Grantor Retained Annuity Trust (GRAT): Rules and 2026 Rate

What a GRAT is, in the words of the Code

You transfer property to an irrevocable trust and keep a right to be paid a fixed amount every year for a stated number of years. At the end, whatever remains goes to the people you named, usually children or a trust for them. The gift tax is computed on the day you fund the trust. Section 2702 sets the rule: “The value of any retained interest which is a qualified interest shall be determined under section 7520” (26 U.S.C. 2702(a)(2)(B)), and “The value of any retained interest which is not a qualified interest shall be treated as being zero” (26 U.S.C. 2702(a)(2)(A)). A qualified interest includes “any interest which consists of the right to receive fixed amounts payable not less frequently than annually” (26 U.S.C. 2702(b)(1)). Everything else about a GRAT is the regulation's description of what a qualified annuity interest must be.

One clause is often mis-cited. Section 2702(a)(3)(A)(i) is the exception for a transfer that is “an incomplete gift”; it does not list the annuity requirements. The next clause, (a)(3)(A)(ii), exempts a trust all of whose property is a personal residence, which is the qualified personal residence trust (see our guide to the qualified personal residence trust). A GRAT holding a rental or an LLC interest falls in neither exception, so the annuity tests apply in full (our reading).

Source: 26 U.S.C. 2702, United States Code 2024 edition (govinfo.gov); 26 CFR 25.2702-3, eCFR (version of October 1, 2026).

The hurdle rate: the 5.6% Section 7520 rate for October 2026

The Section 7520 rate is not chosen by the trust. The statute fixes it: values are determined “by using an interest rate (rounded to the nearest 2/10ths of 1 percent) equal to 120 percent of the Federal midterm rate in effect under section 1274(d)(1) for the month in which the valuation date falls” (26 U.S.C. 7520(a)(2)). The two-month look-back election in the same subsection is allowed only if “an income, estate, or gift tax charitable contribution is allowable for any part of the property transferred”, so a GRAT, which has no charitable part, uses the rate of the month it is funded (our reading). For October 2026, the IRS published 120% of the mid-term rate as 5.54%, rounded to 5.6% (Rev. Rul. 2026-19, Table 5). Our applicable federal rate guide lists all ten 2026 rulings.

Source: IRS, “Section 7520 interest rates” (page updated September 25, 2026) and “Section 7520 interest rates for prior years”. The IRS prints the 2026 and recent rates to one decimal, and some earlier ones to two; all ten months of 2026 are in the CSV.

What the rate does: it is the return the IRS assumes the trust will earn when it values the annuity you keep. The Treasury put the consequence plainly in its fiscal year 2025 General Explanations: if the assets of a GRAT “appreciate at a rate that exceeds the relatively low statutory interest rate used to value the grantor's retained annuity interest, that excess appreciation will have been transferred to the remainder beneficiaries with little or no gift tax.” That is the hurdle. At 5.6% it is higher than in any of the Octobers of 2020 to 2025 in the table above, and the annuity needed for a zero gift is larger: for a 5-year term it is 20.2406% of the starting value a year at the 0.4% rate of October 2020, 22.4627% at the 4.0% of October 2022, and 23.4819% at 5.6% (our arithmetic). A property that returns 5.6% a year in total, distributions plus appreciation, leaves nothing for the heirs; one that returns more leaves the excess (our reading and arithmetic, below).

Zeroed-out GRATs and 115 T.C. 589 (2000)

Treasury Regulation 25.2702-3(e), Example 5, once concluded that when a grantor retained a payment for a 10-year term that would go to the grantor's estate if the grantor died, the amount payable to the estate was not a qualified interest. The Tax Court held that example invalid in 115 T.C. 589 (2000) (115 T.C. No. 41, docket No. 3824-99, decided December 22, 2000), a case about a GRAT with a two-year term. We cite the decision by reporter citation and docket number; we could not retrieve the opinion text from the Tax Court or CourtListener on October 13, 2026, so what the court held is quoted from the IRS's own notice and the Treasury's preamble.

The IRS accepted the result. Notice 2003-72 says the IRS “will follow the Tax Court's decision” in the case and that the court concluded that “a retained annuity payable for a specified term of years to the grantor, or to the grantor's estate if the grantor dies prior to expiration of the term, is a qualified interest under § 2702 for the specified term of years.” It adds: “The IRS acquiesces in the Tax Court's decision.” The final regulations of February 25, 2005 (T.D. 9181, 70 FR 9224) describe the same event, “the court declared Example 5 of § 25.2702-3(e) to be invalid”, and Example 5 now reads that the interest of the grantor “(and A's estate) to receive the unitrust amount for the specified term of 10 years in all events is a qualified unitrust interest for a term of 10 years.”

Two things follow from the text (our reading). First, the legal basis of a zero gift is the zero rule in 2702(a)(2)(A) combined with a fully qualified annuity under 25.2702-3, and the regulation requires that “A holder's qualified interest must be payable in any event to or for the benefit of the holder for the fixed term of that interest” (25.2702-3(d)(2)); an instrument that pays the grantor's estate if the grantor dies meets that test for the whole term. Second, the court's rule is about valuing the retained interest, not about what happens to the property at death. T.D. 9181 says so: commentators asked the Treasury to address the amount included in the grantor's gross estate if the grantor dies in the term, and the application of section 2035 after it, and the Treasury answered that the amount “is an issue different from and governed by different Code sections” and that “Treasury and IRS will consider addressing that issue in future guidance.”

A worked illustration: a $5,000,000 interest, October 2026 (our arithmetic)

Assumptions, ours: an interest in a private real estate fund or LLC appraised at $5,000,000 on the funding date, a gift of the whole interest to a GRAT in October 2026, annual payments at the end of each year, the 5.6% rate, and a taxable gift of $0 at funding. The script that produced every figure (grat_calc.py) and its output are saved with the CSV.

Our arithmetic from the Section 7520 rate of 5.6% (Rev. Rul. 2026-19). The annuity is the one whose present value equals the property, so the gift at funding is zero. The 120% rising schedule is the limit in 26 CFR 25.2702-3(b)(1)(ii).

What the heirs receive at the end of the term depends only on how the property performs. The next table runs the same $5,000,000 through five total returns a year (income plus appreciation, annuity paid in cash or in kind at the end of each year, no fees and no tax inside the trust).

Our arithmetic; amounts are what remains in the trust for the remainder beneficiaries at the end of the term. Below the hurdle the trust pays out all it holds and the grantor keeps the assets; at a 3% return the 5-year level grantor receives $5,433,416 over five years.

What the example leaves out, and what it shows (our reading):

• A weak result costs little, a strong one pays a lot. That asymmetry is what the Treasury describes as little to no cost or downside risk for the grantor, and it is what the proposals below aim at.
• A rising annuity leaves more above the hurdle. At an 8% return the 5-year trust ends with $514,658 instead of $458,694 because less is paid out early; below the hurdle both leave $0.
• A 2-year GRAT pays the grantor 54% of the starting value each year. The remainder is small unless the return is high, which is why shorter terms are chosen when a valuation event is expected soon.
• Mortgages, fees, taxes and uneven returns are not in the table. Real estate returns are not smooth, and the annuity is owed whether or not the property had a good year.

For the estate-tax threshold the heirs' result is measured against, the 2026 basic exclusion amount is $15,000,000 (Rev. Proc. 2025-32); see our guide to the estate tax exemption and, for the smaller yearly gifts, the annual gift tax exclusion.

If the grantor dies during the term

Section 2036(a)(1) includes in the gross estate property the decedent transferred, by trust or otherwise, under which the decedent kept “the possession or enjoyment of, or the right to the income from, the property” for life or for a period that does not in fact end before death. A GRAT keeps an income-like right for the term, so a grantor who dies in the term brings the GRAT within section 2036(a) (our reading). If it is included, the GRAT has not moved the property out of the estate, and what is left is the cost of having set it up (our reading). T.D. 9181 says the Treasury has not issued rules on how much is included (“Treasury and IRS will consider addressing that issue in future guidance”), so the amount depends on the facts and on the Code sections the Treasury named rather than on a published formula.

The chance of dying in the term is measured here with the IRS's own mortality table, Table 2010CM in 26 CFR 20.2031-7(d)(7)(ii). It describes a population, not you: your health, your age and your family history differ.

Our arithmetic: one minus l(x+n) divided by l(x), from the l(x) column of Table 2010CM, 26 CFR 20.2031-7(d)(7)(ii) (eCFR, version of October 1, 2026).

The income tax basis shows the trade-off for an appreciated property (our reading). Property that is “required to be included in determining the value of the decedent's gross estate” is treated as acquired from the decedent (26 U.S.C. 1014(b)(9)), so a date-of-death basis applies (26 U.S.C. 1014(a)(1)). Property that passes to heirs at the end of a surviving grantor's term is a gift, and for a gift “the basis shall be the same as it would be in the hands of the donor” (26 U.S.C. 1015(a)). A GRAT that works therefore sends heirs the appreciation without a step-up, and a GRAT that fails by death gives them a step-up with no transfer-tax saving. Our guide to step-up in basis on inherited real estate covers the second case.

Who pays the income tax: Rev. Rul. 2004-64

A GRAT is normally drafted as a grantor trust, which means its income is taxed to you, not to the trust (our reading). Rev. Rul. 2004-64, 2004-27 I.R.B. 7 (July 6, 2004), addresses what happens to the tax. Under section 671, “those items of income, deductions, and credits against tax of the trust that are attributable to that portion of the trust must be included in computing the taxable income of the grantor.” The ruling holds that when the grantor pays that tax, “the grantor is not treated as making a gift of the amount of the tax to the trust beneficiaries.” For an owner of a fund interest that sends a Schedule K-1 every year, the practical result is that the trust's share of the income is reported on the grantor's return while the tax does not reduce the trust's assets (our reading).

The ruling also names the trap: “If, pursuant to the trust's governing instrument or applicable local law, the grantor must be reimbursed by the trust for the income tax payable by the grantor that is attributable to the trust's income, the full value of the trust's assets is includible in the grantor's gross estate under § 2036(a)(1).” Where the trustee only has discretion to reimburse, “the existence of that discretion, by itself (whether or not exercised) will not cause the value of the trust's assets to be includible in the grantor's gross estate,” although a pre-arranged understanding, a power to remove the trustee and name yourself, or a local law that exposes the trust's assets to your creditors can change that. S. 4287 would reverse the no-gift holding for new trusts: it would treat a grantor's payment of tax on the income of a grantor trust as a taxable gift unless the trust reimburses it in the same calendar year.

The real estate problems the statute does not solve

Sources: 26 CFR 25.2702-3 and 301.6501(c)-1 (eCFR); 26 U.S.C. 2704; S. 4287 as introduced (congress.gov). For the discount cases and the Treasury's withdrawn 2016 rule on section 2704, see our family limited partnership guide. Our census of real estate LLC and LP offerings in SEC Form D shows how many such private partnerships exist.

Two practical notes (our reading). First, a private fund or non-traded REIT operating agreement usually restricts transfers or requires the manager's consent; the Code does not override the agreement, so each in-kind payment is a transfer that has to be allowed. Second, the annuity is stated in dollars or as a percentage of value, not as the distributions the property pays; a property that pays little in cash does not reduce what is owed.

What is proposed (not law)

A GRAT as described above is current law as of October 13, 2026. Proposals to restrict it are repeated; none is enacted.

Sources: S. 4287 and S. 3988 as introduced (congress.gov, GPO text); Treasury, General Explanations of the Administration's Fiscal Year 2025 Revenue Proposals (March 11, 2024), pages 126 to 131. A bill must pass both chambers and be signed; we have no basis to predict that these will.

The question of a 2-year minimum is answered by the documents: the minimum terms in them are 10 and 15 years, and the two years that people quote are the term of the trust in 115 T.C. 589, not a proposed floor. The Treasury's reasons are in the same document. It says that, with a very small remainder, even if the assets do not significantly appreciate “the GRAT involved little to no cost or downside risk for the grantor”, and that because the grantor “cannot allocate GST exemption to the GRAT until the end of the GRAT term” the generation-skipping tax raises separate questions. The GRAT part of the proposal would apply to “all trusts created on or after the date of enactment”, so a trust funded before enactment is outside that language (our reading of the proposal).

What the IRS counts: Form 709 gift tax returns

A transfer to a GRAT is reported as a gift on the donor's gift tax return, and 26 CFR 301.6501(c)-1(f)(2) sets what that return must disclose for a transfer reported as a gift, including “the trust's tax identification number and a brief description of the terms of the trust” (our reading). The IRS does not publish a GRAT count in its gift tax tables (our check of the Statistics of Income page); the closest data are its counts of all Form 709 returns, filed in 2021, the latest year on that page as of October 13, 2026:

Source: IRS Statistics of Income, Gift Tax Study, Table 21gf01 (July 2023), read with the script saved beside our CSV. Taxable share of all returns 0.72%; nontaxable share of the $1 million or more band 96.2% (our arithmetic).

Most large gifts owe no tax because the lifetime exclusion absorbs them. A zeroed-out GRAT would be among the nontaxable returns, and these tables cannot tell it apart from other gifts.

Verdict: what the primary sources say a GRAT is for

The text describes a narrow tool. It works for property that is expected to earn more than the Section 7520 rate after payments, held by someone likely to survive the term, in a form that can be valued at funding and paid out in kind. It does nothing for property that will not beat 5.6% a year, and the October 2026 rate makes the bar higher than in 2020 to 2022. For an interest in a private real estate fund, the added questions are the in-kind payment, the appraisal and the operating agreement's transfer rules. A GRAT is drafted by an estate-planning attorney, valued by an appraiser and reported with a CPA; the match below is with fee-only or fee-based financial advisers, who are generally not the attorney and appraiser a GRAT needs, and it can help you look at where such a trust sits in your wider plan, not draft or file one.

What an owner can do with this

• Ask for the zero-out computation. The attorney's gift tax computation shows the Section 7520 rate used (the month of funding, 5.6% in October 2026), the annuity percentage, and the value of the remainder.
• Ask who appraises the interest and whether the report meets 26 CFR 301.6501(c)-1(f)(3), or whether the return will disclose 100 percent of the entity's value under (f)(2)(iv).
• Ask how the annuity is paid. Cash from distributions, units in kind, or both; and whether the fund's agreement permits the transfers.
• Ask what happens on death in the term, including which Code sections the advisers expect to apply and what the heirs' basis would be.
• Check the tax-reimbursement clause against Rev. Rul. 2004-64; a clause that requires the trust to repay your income tax is the one the ruling treats as including the full value in your estate.
• Read the status of S. 4287 on congress.gov before funding; a trust created after enactment of a restriction would be governed by it.

FAQ

Sources, read and saved on October 13, 2026: 26 U.S.C. 1014, 1015, 2036, 2702, 2704 and 7520 (United States Code 2024 edition, govinfo.gov); 26 CFR 25.2702-3, 301.6501(c)-1 and 20.2031-7 (eCFR, version of October 1, 2026); Rev. Rul. 2004-64, 2004-27 I.R.B. 7 (irs.gov, Internal Revenue Bulletin 2004-27); IRS Notice 2003-72 (irs.gov); T.D. 9181, 70 FR 9224 (February 25, 2005, govinfo.gov); Rev. Rul. 2026-19, Rev. Proc. 2025-32 and the IRS Section 7520 interest rate pages (irs.gov); the Tax Court decision at 115 T.C. 589 (2000), docket No. 3824-99, cited by reporter citation, with its record in the CourtListener index (opinion text not retrievable); S. 4287 (119th Congress) and S. 3988 (118th Congress) as introduced (congress.gov); U.S. Department of the Treasury, General Explanations of the Administration's Fiscal Year 2025 Revenue Proposals (March 11, 2024, home.treasury.gov); IRS Statistics of Income, Gift Tax Study, Table 21gf01. Annuity percentages, remainders, shares of deaths, sums and shares are our arithmetic (script saved with the data); interpretations marked “our reading” are ours. This is analysis of public documents, not investment, legal or tax advice.