How a GRAT Works
The grantor funds the GRAT with assets expected to grow, such as concentrated stock or pre-IPO equity. The trust pays the grantor a fixed annuity for a chosen term (often two to five years). At the end of the term, anything left in the trust passes to the named beneficiaries.
Why It Saves Tax
The IRS values the gift to the beneficiaries by assuming the trust earns only the Section 7520 hurdle rate. If the actual return beats the hurdle rate, the excess transfers to beneficiaries gift-tax free. If it does not, the assets simply return to the grantor and there is no downside besides setup cost.
GRAT Risks
The grantor must outlive the term, otherwise the trust assets are pulled back into the taxable estate. GRATs are best suited for high-net-worth Arizona families working with experienced estate planners.
Arizona Income vs. Principal Rules
The annuity payments to the grantor are characterized under Arizona's principal and income statute, A.R.S. 14-7401.