Estate / freeze structures

GRAT and IDGT sale

Both structures freeze the estate at today’s value and pass future growth to the family. A GRAT gives the grantor an annuity for a term; a sale to an intentionally defective grantor trust takes back a note at the AFR. One is cheap but needs survival, the other is larger but needs a real sale.

VehicleGRAT§75204.00%Survival84.7%

Taxable gift

$2,972,276

59.4% of the contribution

Remainder to family

$7,172,984

After $250,000 a year back to the grantor

Net to family

$5,984,074

After $1,188,910 of transfer tax

Leverage

2.41×

Remainder per dollar of taxable gift

Two ways to freeze the estate

Both pass future growth to the family; they differ in what is given away up front and what stays in the estate.

$7,172,984

Two ways to freeze the estate
Measure	GRAT	IDGT sale
Amount transferred	$5,000,000	$5,000,000
Gift at the outset	$2,972,276	$500,000
Paid back to the grantor	$2,500,000	$7,000,000
Value outside the estate	$7,172,984	$3,604,257
Stays in the estate	$0.00	$5,000,000
Gift tax	$1,188,910	$200,000
State gift tax	$0.00	$0.00
GST	$0.00	$0.00
Net to family	$5,984,074	$3,404,257
Leverage	2.41×	7.2×
Survival risk	Assets return to the estate	None: the sale is complete

A GRAT is a bet on the grantor surviving the term; the sale to a defective trust is not. That is why the GRAT is usually cheaper and the sale usually larger.

Value transferred against the trust return

The GRAT starts at zero until the return clears the hurdle; the sale is positive from the first basis point above the AFR.

Where the value sits

What the family gets against what stays in the estate.

Canonical equations

The exact relationships implemented by this engine.

V − annuity · a(n, r) · Zero when the annuity is V / a(n, r).

V(1+g)ⁿ − annuity · ((1+g)ⁿ − 1)/g · Growth above the hurdle.

sale price · AFR · Interest-only, balloon at maturity.

trust value − note principal · What the assets earned above the note.

Show model notation and computationOpen the symbolic form, the variable definitions, and the step-by-step derivation when you need the detail.

A clear path from inputs to results.

Step-by-step methodWorked exampleAssumptions explained

The formula

\text{GRAT gift} = V - A\,a(n,r) \;;\; \text{remainder} = V(1+g)^n - A\frac{(1+g)^n-1}{g}

Reference: IRC §2702 (retained interests), §7520 (valuation); the AFR is published monthly under §1274.

Worked example

$5m GRAT against a $5m sale, 10 years, 8% return

Inputs

Assets worth $5,000,000, term 10 years, §7520 rate 4%.
GRAT annuity 5% a year, survival probability 97%.
Sale with a 10% seed gift, note at 4%, grantor pays $60,000 of income tax a year.
Expected return 8% in both cases.

Calculation path

1
The GRAT pays $250,000 a year, which is below the zeroed-out $616,455, so it carries a $2.97m gift.
2
The trust grows to $10.79m and pays back $2.5m, leaving $7.17m for the family — 2.41× the gift.
3
The sale's note costs $200,000 a year in interest; the assets still grow to $10.79m.
4
After repaying the $5m note and crediting the tax payments, $3.60m sits outside the estate for a $500,000 seed gift: 7.2×.
5
Transfer tax avoided: $2.87m on the GRAT, $1.44m on the sale.

Result

GRAT gift $2.97m, remainder $7.17m · sale transfers $3.60m for a $0.5m gift.

Interpreting the result

The GRAT is the cheaper structure because the annuity is a retained interest, not a gift — but it is a bet on survival, and if the grantor dies inside the term the assets come back into the estate. The sale transfers more per dollar of gift because the note is repaid at the AFR rather than at the hurdle, but it needs a genuinely independent trustee and a properly serviced note.

Assumptions & limitations

A single contribution, a fixed term and a constant total return.

The GRAT remainder is weighted by the probability the grantor survives the term.

The sale uses interest-only payments with a balloon at maturity; the note stays in the estate.

Federal transfer tax at 40%; no GST, no state tax and no income tax on the note interest.

Frequently asked questions

What is a zeroed-out GRAT?

One where the annuity is set so the remainder has no value at the §7520 rate, so the gift is essentially zero. Everything above the hurdle passes to the family free of gift tax.

Why use a defective trust rather than a plain one?

Because a grantor trust lets the grantor pay the trust's income tax, which is an additional tax-free gift and lets the trust compound faster. That is the 'defective' part, and it is deliberate.

Why is the GRAT a bet on survival?

Because the grantor must outlive the term. If they die inside it, some or all of the trust is pulled back into the estate and the freeze fails.

How large should the seed gift be?

Around 10% of the sale price is the usual comfort level: enough that the trust has real equity, small enough to use little exemption.