GRATs, SLATs, and Other Advanced Transfer Strategies

Even after the One Big Beautiful Bill Act made the $15M federal exemption permanent, estates exceeding the combined $30M married exemption — or sitting in high-tax states like New York or Massachusetts — still require active transfer planning. Three vehicles do the work: the grantor retained annuity trust (GRAT), the spousal lifetime access trust (SLAT), and the intentionally defective grantor trust (IDGT). Each removes appreciation from the estate at a fraction of its eventual value.

Grantor retained annuity trusts (GRATs)

A GRAT is authorized under §2702 and Treas. Reg. §25.2702-3. The grantor transfers appreciating assets to an irrevocable trust and retains the right to a fixed annuity for a term of years. The remainder passes to beneficiaries.

• Gift value at funding equals the value of the property transferred minus the present value of the retained annuity, computed using the §7520 rate published monthly by the IRS.
• Zeroed-out GRAT. Setting the annuity to exhaust the funding value reduces the gift to nominal. Walton v. Commissioner, 115 T.C. 589 (2000), validated the structure.
• How it wins. If trust assets earn more than the §7520 hurdle rate (currently around 5.0%–5.4%), the excess passes to beneficiaries gift-tax free. If assets underperform, the remainder is small or zero — the strategy fails benignly.
• Mortality risk. If the grantor dies during the GRAT term, the trust assets are included in the estate under §2036. Short terms (2–3 years) and rolling GRATs reduce this risk.

Spousal lifetime access trusts (SLATs)

A SLAT is an irrevocable grantor trust for the benefit of the other spouse. Contributions use the donor spouse's exemption; the trust assets are removed from the donor's estate while the donee spouse retains indirect access via distributions.

• Grantor trust status under §677(a) makes the donor spouse responsible for income tax on trust income — a feature, not a bug. The tax payment is itself a non-gift transfer that further depletes the taxable estate.
• Reciprocal trust doctrine. Two spouses creating mirror-image SLATs for each other risk having both trusts collapsed into their estates. United States v. Estate of Grace, 395 U.S. 316 (1969). Substantial differences (asset mix, trustee, distribution standards, terms, timing) are required.
• Death or divorce of the beneficiary spouse eliminates the donor's indirect access. Plan accordingly.

Intentionally defective grantor trusts (IDGTs) and installment sales

An IDGT is an irrevocable trust treated as the grantor's for income tax purposes (§§671–679) but completed for transfer tax purposes. The grantor may sell appreciating assets to the trust for an installment note bearing the §1274 applicable federal rate (AFR).

• No gain recognized on the sale because the grantor is treated as transacting with himself for income tax under Rev. Rul. 85-13.
• Appreciation above the AFR passes to the trust without gift tax consequence.
• Note structure typically uses a 9-year mid-term note (current AFR ~4.4%) or self-canceling installment notes (SCINs) priced to reflect the §7520 mortality discount.
• Seed capital. Best practice is to gift the trust 10% of the eventual sale value (a "seed gift") to ensure the trust has substance. Without seed, the IRS may challenge the trust as undercapitalized and disregard the note.

Worked example: $5M GRAT

Funding: $5,000,000 of pre-IPO stock. Term: 2 years. §7520 rate: 5.2%. Zeroed-out annuity payments: approximately $2,693,000 in year one and $2,693,000 in year two. Gift value at funding: approximately $0.

If the stock appreciates 60% over the two years (IPO occurs, value becomes $8,000,000), the trust pays back $5,386,000 in annuity payments and the remainder — approximately $2,614,000 — passes to beneficiaries free of gift and estate tax. If the stock instead drops 30%, the annuity exhausts the trust, beneficiaries receive nothing, and the grantor is no worse off than holding the stock directly.

Common mistakes

• Treating SLATs as reversible. They are not. If circumstances change, the donor cannot retake the assets without triggering inclusion or gift consequences.
• Ignoring §2701 in GRAT funding. Transfers of interests in family-controlled entities can trigger §2701 valuation traps. Always test for §§2701, 2702, 2703, 2704 issues before transferring closely held interests.
• Stale §7520 rate assumptions. The rate is published monthly. GRAT effectiveness varies materially based on the funding-month rate.
• Forgetting GST allocation. Transfers to dynasty trusts require explicit GST exemption allocation on Form 709. Inadvertent allocation to a non-skip transfer wastes exemption.
• State-level exposure. A New York resident with a $20M estate cannot solve state-level tax with federal-exemption trusts; New York lacks portability and has a sharp three-year lookback under N.Y. Tax Law §954(a)(3).

Sources

• Internal Revenue Code §2702, valuation rules for retained interests: law.cornell.edu/uscode/text/26/2702
• Internal Revenue Code §§671–679, grantor trust rules: law.cornell.edu §§671–679
• Internal Revenue Code §7520, valuation tables and rate: law.cornell.edu/uscode/text/26/7520
• Rev. Rul. 85-13, sale to grantor trust treated as no sale: irs.gov rr85-13.pdf
• Walton v. Commissioner, 115 T.C. 589 (2000): ustaxcourt.gov walton

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