The One Big Beautiful Bill Act made the $15 million federal estate and gift exemption permanent on January 1, 2026, and in doing so it quietly rewrote the job description of the grantor retained annuity trust. For a decade, GRATs were a sideshow to the “use it or lose it” rush to gift before the scheduled 2026 sunset. With the sunset gone and the Section 7520 hurdle rate sitting at 5.0% for June 2026, GRAT estate planning becomes the cleanest way to push appreciation out of an estate without spending a dollar of the exemption families now want to guard.
The shift is subtle and most coverage misses it. When the exemption was about to be cut roughly in half, the entire conversation was about giving assets away fast to lock in the high number. Now that $15 million per person, $30 million per couple, is permanent and indexed, the urgent risk is no longer the calendar. It is growth. A $12 million estate that compounds at 8% crosses $15 million in about three years and keeps climbing. The GRAT exists to catch that appreciation and move it downstream while leaving the exemption untouched.
Key Takeaways
- The OBBBA set the federal estate, gift, and GST exemption at $15 million per person ($30 million per couple), permanent and indexed, starting January 1, 2026.
- A zeroed-out GRAT moves appreciation above the Section 7520 hurdle to heirs free of gift and estate tax, using none of the lifetime exemption.
- At the June 2026 hurdle of 5.0%, a $10 million two-year GRAT funded with stock that returns 15% a year passes roughly $1.66 million to heirs at zero gift-tax cost.
- GRATs are generation-skipping inefficient because of the estate tax inclusion period, so they pair best with a separate dynasty gift rather than serving grandchildren directly.
- The freeze play is asymmetric: if assets underperform the hurdle the GRAT simply fails and the grantor gets the property back, out only the setup cost.
What Changed When the $15 Million Exemption Became Permanent?
For years the dominant estate-planning story was a deadline. The 2017 tax law doubled the exemption but set it to sunset at the end of 2025, dropping it back to roughly $7 million per person. That looming cut drove the wave of large gifts, spousal lifetime access trusts, and exemption-burning transfers we covered through 2025. The OBBBA erased the cliff and locked the number at $15 million.
Permanence flips the planning posture from urgency to patience, and patience changes which tools win. When you fear losing exemption, you spend it. When the exemption is secure but the estate keeps growing, you want to move future appreciation out without touching the exemption at all. That is the GRAT’s entire purpose. It freezes the current value of an asset in the estate and ships the upside to the next generation, and a properly zeroed-out GRAT does it without reporting a taxable gift.
The math now favors the family in the $15 million to $40 million band most of all. They are not desperate to give everything away, because the exemption already shields a large base. Their exposure is the marginal appreciation that pushes a covered estate back into taxable territory. As The Tax Adviser laid out in its May 2026 analysis of multigenerational transfer planning, the live question for these households is no longer how to use the exemption before it vanishes but how to keep growth from clawing the estate back over the line.
How Does a GRAT Move Wealth Without Using the Exemption?
A GRAT is a short-term irrevocable trust. The grantor puts in an asset, say appreciated stock, and keeps the right to a fixed annuity payment for a set term of two or three years. At the end of the term, whatever is left in the trust passes to the remainder beneficiaries, usually the children or a trust for them.
The trick is in the valuation. The IRS values the gift of the remainder using the Section 7520 rate, the assumed growth rate it bakes into the calculation. Size the annuity payments so their present value equals the full amount contributed, and the calculated value of the remainder gift is zero. This is the “zeroed-out” GRAT. The grantor reports no taxable gift and uses no exemption. If the asset then grows faster than the 7520 hurdle, every dollar of that outperformance lands with the heirs, transfer-tax-free.
The hurdle rate is the whole game. At a 5.0% rate for June 2026, the asset only has to beat 5.0% a year for the strategy to move wealth. That is a low bar for equities, concentrated stock, or pre-liquidity-event shares, and it is the reason GRATs work in almost any rate environment as long as the underlying asset can outrun the rate. A higher 7520 rate raises the bar and trims the leverage; the current 5.0%, down from the 5.6% peak in mid-2024, is a more forgiving setup than estate planners faced two years ago.
$10 Million, Two Years, One 5.0% Hurdle: The Numbers
Abstract mechanics convince no one. Run a real one. A client funds a two-year zeroed-out GRAT with $10 million of stock in June 2026, when the 7520 rate is 5.0%. To zero out the gift, the annuity payment is set at about $5,378,100 a year, the figure whose two payments have a present value equal to the $10 million contribution at a 5.0% discount rate.
Now assume the stock returns 15% a year over the term. Year one: the $10 million grows to $11.5 million, the trust pays the $5,378,100 annuity back to the grantor, and $6,121,900 remains. Year two: that balance grows 15% to about $7,040,185, the trust pays the second annuity, and roughly $1,662,085 is left. That $1.66 million passes to the remainder beneficiaries free of gift and estate tax, and the grantor used zero exemption to do it. The $5.38 million annuity payments simply returned to the grantor’s estate, plus a modest interest factor, exactly as designed.
The downside is where the asymmetry lives. Suppose the stock returns 5.0% or less. The annuity payments hand the entire trust back to the grantor, nothing passes to the heirs, and the GRAT has “failed.” But failure costs only the legal and administrative setup. No exemption was spent, no gift tax was triggered, and the assets are right back in the grantor’s hands to try again. A client can run a fresh GRAT every year, a “rolling GRAT” program, and capture whichever years the market cooperates. Heads the family wins a tax-free transfer, tails it pays a lawyer’s fee. That asymmetry is why GRATs are a staple of the largest estates regardless of the rate.
Why GRATs Are a Trap for Generation-Skipping Planning
Here is the sophistication most generic GRAT explainers skip, and it is the part that decides how you build the structure. A GRAT is estate-tax efficient but generation-skipping-tax inefficient, and the two are not the same problem.
The reason is the estate tax inclusion period, the ETIP. While the grantor holds the retained annuity interest, the property is still treated as potentially includible in the estate, so the law bars the grantor from allocating generation-skipping transfer exemption to the trust until the annuity term ends. By the time the ETIP closes and exemption can be allocated, the assets have already appreciated, so allocating GST exemption then is expensive and inefficient. A GRAT remainder is a poor vehicle to fund a multigenerational dynasty trust for grandchildren, because the GST shield arrives too late to cover the growth.
The fix is a two-tool structure, and it is the practitioner answer that separates a real plan from a template. Use the GRAT to do what it does best: freeze appreciation for the children’s generation, transfer-tax-free, with no exemption spent. Then, separately, make a direct gift of exemption assets to a GST-exempt dynasty trust for the grandchildren, allocating GST exemption at the moment of the gift while the assets are still at their lower value. One tool moves appreciation without exemption; the other plants exemption-protected principal for the skip generation. Trying to make a single GRAT serve both jobs is how families discover the ETIP rule the hard way. This same layered logic drives the trust restructuring work for $3 million to $14 million estates now that the exemption is fixed rather than fading.
Who Should Run a GRAT in 2026, and Who Should Not?
The GRAT is not a universal tool, and matching it to the wrong asset or the wrong client wastes the strategy. It shines with assets primed to outrun a 5.0% hurdle and to do it with volatility: concentrated single stocks, founder shares ahead of a liquidity event, pre-IPO equity, and holdings the grantor believes are temporarily depressed. Volatility is a friend here, because a rolling program of short GRATs captures the up years and discards the down ones.
It fits poorly elsewhere. Hard-to-value or deeply illiquid assets create appraisal risk and annuity-funding headaches, since the trust must make its annuity payments on time and may have to distribute fractional interests back to the grantor. A client who needs the asset for cash flow should not lock it into a GRAT’s payment schedule. And the strategy assumes the grantor survives the term. Mortality is the GRAT’s true enemy: if the grantor dies during the annuity term, much of the trust property is pulled back into the taxable estate and the freeze unwinds. That is the core argument for short two- and three-year terms over long ones, especially for older or unwell grantors.
There is also a coordination point with the rest of the plan. A GRAT works alongside, not instead of, the exemption gifts and state-tax strategies that protect an estate. For business owners, the same discipline that flags a buy-sell agreement as a hidden state estate-tax exposure applies to GRAT funding: value the asset correctly, document the structure, and fix the mechanics while the owner is alive and insurable. A GRAT layered onto a sloppy underlying plan inherits every flaw beneath it.
Three Questions for the Next Estate-Planning Review
The permanent exemption did not end estate planning for affluent families; it changed the target from the calendar to compounding. Three questions sort out whether a GRAT belongs in a given plan in 2026.
1. Is appreciation, not the exemption, the real exposure for this estate? Project the estate forward at a realistic growth rate. If a currently covered estate crosses $15 million (or $30 million for a couple) on appreciation within a decade, a GRAT addresses that growth without spending the exemption the family wants to keep. If the estate is far below the line, the GRAT may be premature.
2. Does the client hold an asset that can beat a 5.0% hurdle with some volatility? GRATs reward concentrated stock, pre-liquidity shares, and temporarily depressed holdings. Match the GRAT to that asset, choose a short term, and consider a rolling program rather than one long GRAT, so a single bad year does not sink the whole strategy.
3. Are the GST and estate goals being handled by the right separate tools? Because of the ETIP rule, do not ask a GRAT to seed a dynasty trust for grandchildren. Pair the GRAT’s appreciation freeze with a separate GST-exempt gift, and allocate generation-skipping exemption while the assets are still small. Two jobs, two tools, one coordinated plan.
About Me
Associate Editor of financial news at Market signals where he writes and edits original analysis in and around the wealth management, as well as other parts of the financial markets and economy. He has more than five years of experience editing, proofreading, and fact-checking content on current financial events and politics.
