What is a zeroed-out GRAT?

A Grantor Retained Annuity Trust where the annuity payments back to the grantor are sized so their present value, discounted at the IRS's §7520 rate, exactly equals the value contributed — making the taxable gift at funding approximately $0.

What is the §7520 rate?

A monthly rate the IRS publishes (120% of the federal mid-term applicable federal rate) used as the required discount rate for GRATs and other split-interest trusts. It was 5.20% for August 2026. If the trust's assets grow faster than this rate, the excess passes to heirs gift-tax free.

What happens if a GRAT underperforms the §7520 rate?

Nothing is lost from a gift-tax perspective. The annuity payments simply return the full value (plus interest at the §7520 rate) back to the grantor, and nothing passes to the remainder beneficiaries — but no gift tax was ever owed either, since the trust was zeroed out at funding.

Why do people use short 2-year GRAT terms?

If the grantor dies during the annuity term, the remaining trust value is generally pulled back into the taxable estate. A 'rolling' series of short 2-year GRATs limits how much value is exposed to this mortality risk at any one time, compared to a single long-term GRAT.

A Zeroed-Out GRAT Turns 15% Growth on $1M Into $163K of Gift-Tax-Free Wealth for Heirs

We ran a $1,000,000 asset through the calculator at the August 2026 §7520 rate of 5.20%, a 2-year term, assuming 15% actual growth: the zeroed-out annuity pays $539,329/year back to the grantor ($1,078,659 total over 2 years), and $162,942 remains in the trust at the end of the term — passed to heirs completely free of gift tax. Drop the assumed growth to 3% (below the §7520 rate) instead, and the remainder is exactly $0 — the trust simply returns everything to the grantor through the annuity, with no gift tax ever having been owed either way.

A strategy with an asymmetric payoff

Scenario	Assumed growth	Remainder to heirs (gift-tax-free)
Strong outperformance	15% (vs. 5.20% §7520 rate)	$162,942
Breakeven	5.20% (exactly the §7520 rate)	~$0
Underperformance	3% (below the §7520 rate)	$0

This is why concentrated, volatile positions — a founder’s pre-IPO stock, a single high-conviction holding — are the classic GRAT funding asset: the strategy’s entire value comes from the CHANCE of outperformance, and volatility increases the odds that at least some 2-year windows beat the §7520 rate, even if the average return over many years is more modest.

The one real risk: dying mid-term

If the grantor doesn’t survive the annuity term, the remaining trust value is generally pulled back into the taxable estate — undoing the transfer. This is the reason most GRATs today use short, “rolling” 2-year terms instead of one long-term structure: each 2-year GRAT that completes locks in its remainder permanently, and only the current, still-running GRAT is exposed to mortality risk at any given time.

Where this framework doesn’t apply

The grantor’s health or life expectancy makes surviving even a 2-year term uncertain. The core protection (rolling short terms) has limits if mortality risk itself is elevated.
The asset is low-volatility and unlikely to beat the §7520 rate. GRATs work best with assets that have a real chance of significant outperformance, not steady, modest returns.
The grantor needs the asset’s income or liquidity during the term. The annuity schedule is fixed at funding — it doesn’t flex for changing cash needs.
The estate isn’t exposed to estate tax at all. Check state-level exposure first — it’s often the more common bite even when federal exposure isn’t a concern.

What to actually do

Get the actual current-month §7520 rate from the IRS rather than assuming a fixed figure — it changes monthly.
Consider a short, rolling 2-year GRAT structure to limit mortality risk rather than one long-term GRAT.
Fund the GRAT with a volatile, appreciation-oriented asset — the strategy’s value comes from upside potential, not steady income.
Work with an estate attorney to ensure the trust qualifies under IRC §2702’s strict requirements.
If the goal is a charitable remainder instead of a family remainder, the same §7520 present-value math applies to a Charitable Remainder Trust — a related but distinctly different structure.

Open the GRAT Wealth Transfer Calculator → and run your own asset value, term, and growth assumption.