when creating a grat a grantor contributes assets in trust but retains a right to receive over the term of the grat the original value of the assets contributed to the trust while earning a rate of return specified by the irs known as the 7520 rate when the grat s term expires the leftover assets essentially any appreciation of the original assets minus the irs assumed return rate are given to the grantor s beneficiaries 
grat risksunder a grat the annuity payments come from interest earned on the assets underlying the trust or as a percentage of the total value of the assets if the individual who establishes the trust dies before the trust expires the assets become part of the taxable estate of the individual and the beneficiary receives nothing making the grat useless a successful grat also assumes that the assets appreciate so if there is a depreciation the grat doesn t work well there is also a risk with the irs s 7520 rate in that it has been so low over the last decade as to reduce the ultimate advantage of using a grat in the first place grat usesgrats are most useful to wealthy individuals who face significant estate tax liability at death in such a case a grat may be used to freeze the value of their estate by shifting a portion or all of the appreciation onto their heirs for example if a person had an asset worth 10 million but expected it to grow to 12 million over the next two years they could transfer the difference to their children tax free if the grantor dies during the term of the grat the value of the remainder interest is also included in the grantor s estate however the grantor can pass the right to receive any remaining annuity payments to their surviving spouse to qualify for the estate tax marital deduction which could eliminate any estate tax liability relating to the grat assets 1grats are especially popular with individuals who own shares in startup companies as stock price appreciation for ipo shares will usually far outpace the irs assumed rate of return that means more money can be passed to children while not eating into the grantor s lifetime exemption from estate and gift taxes grat historygrats saw a big surge in popularity in 2000 as a result of a favorable ruling in the u s tax court involving the walton family of walmart inc fame audrey j walton v commissioner of internal revenue saw the court rule in favor of walton s use of two grats in which annuity payments were set up to return all of the original assets to the grantor and leave only the appreciated value to beneficiaries through this set up the value of the gift originally put in trust is reduced to zero and any remaining value in the trust is transferred to the beneficiary tax free the use of grats in this way is known as a zeroed out grat or walton grat example of a gratfacebook founder mark zuckerberg put his company s pre ipo stock into a grat before it went public while the exact numbers are not known forbes magazine ran estimated numbers and came up with an impressive number of 37 315 513 as the value of zuckerberg s stock 2