How to Use GRATs to Preserve and Pass On Wealth

August 12, 2026

Building significant wealth often takes decades. Passing it on thoughtfully requires the same level of intention. 

For affluent families, the goal is rarely simply to transfer assets from one generation to the next. It is to preserve what has been built, create opportunities for future generations, and structure wealth in a way that reflects the family’s long-term priorities. 

A Grantor Retained Annuity Trust, or GRAT, is one strategy that can help accomplish those goals. For families with appreciating assets, particularly closely held businesses, concentrated investments, or other assets with significant growth potential, a GRAT can provide an efficient way to transfer future appreciation while retaining an income stream for a defined period. 

How a GRAT Works 

A GRAT is an irrevocable trust established for a specific term. The individual creating the trust, known as the grantor, transfers assets into the GRAT and receives fixed annual payments from the trust throughout its term. 

At the end of that period, any assets remaining in the trust generally pass to the beneficiaries. Often children or trusts established for their benefit. 

The strategy is centered on appreciation.

When a GRAT is established, the IRS assumes the assets will grow at a specified rate known as the Section 7520 rate. If the assets in the trust appreciate at a rate greater than that assumption, the growth above the IRS rate may pass to beneficiaries with little or potentially no additional gift tax. 

For families with the right assets and circumstances, that can create a meaningful opportunity to move future growth outside of an estate. 

Turning Future Growth into a Planning Opportunity 

GRATs can be particularly valuable when a family owns an asset it believes has significant appreciation potential. 

Consider a family-owned business that is expected to grow substantially over the coming years. Rather than waiting until that growth has occurred to begin transferring ownership, a family might contribute a portion of the business to a GRAT today. 

The grantor continues receiving the required annuity payments during the GRAT term. If the business grows faster than the applicable IRS hurdle rate, the excess appreciation can remain in the trust and ultimately pass to the next generation. 

This distinction is important. A GRAT is not necessarily about giving away what you have already built. It can be about thoughtfully positioning future growth to benefit the people you intend to support. 

When a GRAT May Be Particularly Effective 

The assets selected for a GRAT can have a significant impact on the effectiveness of the strategy. Because the opportunity comes from appreciation above the IRS hurdle rate, assets with strong growth potential may be particularly well suited. 

These may include interests in privately held or family-owned businesses, concentrated investment positions, assets that have temporarily declined in value but are expected to recover, or other investments with meaningful appreciation potential. 

For business owners, timing can be especially important. Establishing a GRAT before a period of anticipated growth, a transaction, or another event that could increase the value of the business may allow more of that future appreciation to benefit the next generation. 

The strategy should be considered carefully alongside appropriate legal, tax, investment, and valuation guidance, particularly when privately held assets are involved. 

Creating Flexibility Through Rolling GRATs 

Some families use a series of shorter-term GRATs, commonly referred to as rolling GRATs, as part of a longer-term wealth transfer strategy. 

Rather than relying on the performance of assets over one extended period, successive GRATs can create multiple opportunities to transfer appreciation. When assets perform particularly well during one GRAT term, growth above the applicable hurdle rate may pass to beneficiaries. Assets returned to the grantor through annuity payments may then be used to establish another GRAT. 

For families with assets that experience periods of significant growth or volatility, this approach can provide additional flexibility as markets and circumstances evolve. 

Understanding the Considerations 

As with any sophisticated estate planning strategy, a GRAT should be evaluated in the context of the family’s complete financial picture. 

The grantor generally must survive the GRAT term for the strategy to achieve its intended estate planning benefits. If the grantor dies during the term, some or all of the trust assets may be included in the grantor’s taxable estate. 

Families should also consider liquidity needs, asset valuations, investment expectations, administrative requirements, and the costs associated with establishing and maintaining the trust. 

Most importantly, a GRAT should not be viewed in isolation. It is one tool within a much broader wealth planning strategy. 

Connecting Today’s Wealth with Tomorrow’s Goals 

For families with significant wealth, estate planning is about more than minimizing taxes. It is about creating a thoughtful plan for what wealth is intended to accomplish. 

That may mean transitioning a family business to the next generation, providing financial security for children and grandchildren, supporting charitable organizations, or simply creating greater clarity around how wealth will be managed in the years ahead. 

A GRAT can support those objectives by helping families separate the wealth they need today from the growth they hope to pass on tomorrow. 

At First Western Trust, we believe the strongest wealth strategies begin with understanding the complete picture. Our wealth planning, investment management, trust, and private banking teams work together, alongside our clients’ attorneys and tax advisors, to help families evaluate strategies within the context of their broader financial lives. 

Because preserving and passing on wealth is not simply about choosing the right trust. It is about making thoughtful decisions today that support the people, priorities, and legacy that matter for generations to come. 

Is a GRAT Right for Your Family? 

For families with appreciating assets, a potentially taxable estate, or an upcoming business transition or liquidity event, a GRAT may be worth considering as part of a broader estate and wealth transfer strategy. 

The right approach begins with understanding what you have built, what you want to preserve, and how you want your wealth to support the next generation. 

Connect with First Western Trust to explore how your wealth strategy can help you preserve what you’ve built and thoughtfully pass it on. 

Trust, estate planning, insurance, and investment products are not a deposit, not FDIC insured, not insured by any federal government agency, not guaranteed, subject to investment risks, including possible loss of the principal amount invested and may go down in value. Any information and research contained herein do not represent a recommendation of investment advice to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment, and it does not constitute an offer or solicitation to buy or sell any securities or investment services. This content is for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor for specific guidance tailored to your situation. First Western Trust Bank cannot provide tax advice.