Are GRATs great? Depends on the rates - Albuquerque Journal

Are GRATs great? Depends on the rates

Michael Osbun/Tribune Content Agency

Inflation comes with rising prices. It also brings rising interest rates. Bad news if you’re looking for a new mortgage or a refinance.

You can earn 9.62% risk-free on as much as a $10,000 investment in Treasury I Bonds made through October.

Changing interest rates also alter tax-motivated strategies. For those fortunate enough to be concerned about the estate tax, higher interest rates reduce the benefits of a common tax strategy called a Grantor Retained Annuity Trust (GRAT).

In 2022, an estate tax is owed for those with more than $12.06 million of assets. With no change in the law, this threshold may drop to approximately $6.6 million in 2026.

If these numbers are a concern, one strategy is to gift assets before death. The gift reduces what can be transferred at death, but also shifts future appreciation in transferred assets out of the estate.

An asset worth $5 million today could be worth almost $20 million in 15 years if it grows at that 9.62% current I Bond rate.

A gift today could then shift $15 million out of the estate. A GRAT can allow retention of an income stream for the donor’s benefit.

The GRAT acronym has four letters. The “grantor” is the person who owns the property. The “retained” means the grantor keeps some of the benefit from the property.

The “annuity” refers to the amount of the retained benefit. The “trust” refers to the form of the transfer.

Assume a grantor puts the $5 million asset in a trust. The terms say that the grantor retains the right to annual payments of $400,000 for 10 years.

After 10 years, the trust terminates and the property passes to the grantor’s children. Assume the assets are worth $20 million in 10 years because they grow at about 14.4% each year.

The GRAT means the gift is less than $5 million. The grantor “kept” some of the asset, specifically the $400,000 (8%) annual payment.

Retaining $400,000 for 10 years means the grantor will keep a total of $4 million. The tax law says to reduce the amount of the gift by the retained payments.

A simple analysis would say the gift is only $1 million ($5 million minus the retained $4 million).

Because the retained income is paid over 10 years, it must be “discounted” to its present value using a “discount rate.”

Picking a discount rate can be very tricky. The tax law simplifies the process by publishing a rate to use. This rate is based on Treasury yields and changes monthly.

If we didn’t discount the retained payments, they would be worth $4 million. As we discount the value of the retained payments, the gift value rises.

In January, the rate was 1.6%. In May, it was 3%. In July, it is 3.6%. As rates rise, the present value of the retained payments drops. This means the GRAT gift computation rises as rates rise. If you act on a GRAT in July, you can choose to use the July rate, or the rate from either of the preceding two months. You would select the May rate.

For estate tax worriers, the two most important aspects of a GRAT are (1) selecting an asset with “high” growth potential and (2) outliving the GRAT term.

The GRAT saves taxes if trust property grows at a rate more than the published discount rate. It’s not too hard to find an asset that can beat the 3.6% rate.

If the grantor dies when the GRAT is still in force, the full value of the asset is included in the taxable estate.

In the end, it’s a math problem. Picking a higher retained payment reduces the taxable gift. However, if not needed, it also may cause the payments to build up in the estate to be taxed at death.

A longer trust term discounts the retained payments more, and allows the asset to grow more. It also raises the risk that the grantor will not outlive the trust.

If you are worried about the estate tax, either now or in the future, have someone crunch the numbers to see if a GRAT is great or not.

James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at

Home » ABQnews Seeker » Are GRATs great? Depends on the rates

Insert Question Legislature form in Legis only stories

Albuquerque Journal and its reporters are committed to telling the stories of our community.

• Do you have a question you want someone to try to answer for you? Do you have a bright spot you want to share?
   We want to hear from you. Please email

taboola desktop

ABQjournal can get you answers in all pages


Questions about the Legislature?
Albuquerque Journal can get you answers
Email addresses are used solely for verification and to speed the verification process for repeat questioners.
Suspect in food delivery driver killing arrested in California
ABQnews Seeker
Brandon Chatmon, 20, is charged in ... Brandon Chatmon, 20, is charged in the Oct. 27 death of 54-year-old Vincent Lopez
Interior: $580M headed to 15 tribes to fulfill water ...
ABQnews Seeker
WASHINGTON (AP) -- Fifteen Native American ... WASHINGTON (AP) -- Fifteen Native American tribes will get a total of $580 million in federal money this year for water rights settlements, the ...
Albuquerque police tweets slammed by some as intimidation
ABQnews Seeker
Mayor says he supports department’s efforts ... Mayor says he supports department’s efforts against misinformation
Three charged in large-scale drug operation on West Side
ABQnews Seeker
his older brother and the brother’s ... his older brother and the brother’s girlfriend reportedly took the helm. The new management was short-lived. On Thursday agents raided several homes and a ...
Electric Playhouse places bet for second location on the ...
ABQnews Seeker
  Electric Playhouse is placing a ...   Electric Playhouse is placing a bet on Vegas. The Albuquerque-based company that focuses on interactive and immersive play experiences is set to open ...
Lawmakers look at ways to stanch the rise of ...
ABQnews Seeker
Lawmakers showed a bipartisan appetite Friday ... Lawmakers showed a bipartisan appetite Friday to tackle retail theft in New Mexico, which has emerged as a costly problem to businesses — and ...
Lujan Grisham adds to Cabinet as NM celebrates American ...
ABQnews Seeker
James R. Mountain of the Pueblo ... James R. Mountain of the Pueblo de San Ildefonso was appointed Friday to lead the Indian Affairs Department under Gov. Michelle Lujan Grisham. The ...
ABQ woman sentenced to 12 years in wife’s 2019 ...
ABQnews Seeker
An Albuquerque woman who fatally stabbed ... An Albuquerque woman who fatally stabbed her wife was sentenced Friday to 12 years in prison after pleading no contest to second-degree murder in ...
The nitty gritty of Roth IRA conversions
ABQnews Seeker
Roth IRAs offer many benefits over ... Roth IRAs offer many benefits over traditional IRAs. I have written previous articles, encouraging readers to build their Roth IRAs through contributions or conversions. ...