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How a GRAT works: an illustrated example

A grantor retained annuity trust, or GRAT, can direct the future growth of appreciating stock or other assets to your children while providing scheduled payments back to you. The example below walks through a hypothetical two-year GRAT so you can see how the pieces fit together.

Results depend on investment performance, the applicable IRS rate, proper administration, and survival of the trust term.

Hypothetical example · Grantor retained annuity trust (GRAT)

An opportunity to share future appreciation with your children.

Consider a two-year GRAT funded with $2 million in stock. The trust makes scheduled annuity payments back to you. If investment performance leaves value beyond those required payments, the remainder can pass to your children or a trust for their benefit.

Diagram: you contribute 2 million dollars of stock to a two-year GRAT, receive two annuity payments of about 1.076 million dollars, and in this hypothetical about 514,000 dollars remains for your children. Youthe grantor The GRATa two-year trust Childrenor a trust for them $2M in stockyou contribute ≈ $1.076M a year to youtwo equal year-end payments Assumed 20% a yeara favorable assumption, not a forecast ≈ $514,000 remainsafter two years, in this example Hypothetical illustration, not a client result. Assumptions are listed below the example.
  1. Step 1

    You contribute $2 million

    You place $2 million in stock into a two-year GRAT.

  2. Step 2

    Payments back to you

    The trust pays you approximately $1.076 million at the end of each year.

  3. Step 3

    An assumed return

    In this example, the investments grow 20% annually, an assumed favorable outcome, not an expected return.

  4. Step 4

    What remains

    Approximately $514,000 remains for your children after two years.

A gift near zeroThe GRAT is structured so the calculated taxable gift at the outset is approximately zero.
About $2.15M back to youTwo payments of approximately $1.076 million each, based on the assumed 5% rate.
Not guaranteedInvestments can lose value, and nothing may remain for beneficiaries.

Hypothetical illustration, not a client result or investment forecast. Assumes a 5% IRS valuation rate, two equal year-end annuity payments, survival of the two-year term, and no expenses or taxes paid from trust assets. The 20% annual return is an assumed favorable outcome, not an expected return. Actual rates and returns vary; investments can lose value, and nothing may remain for beneficiaries. Income taxes, capital-gains basis, valuation, and administration require separate consideration.

This guide is general information about California and federal law, not legal or tax advice for your situation. Reading it does not create an attorney-client relationship.

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