GRAT annuity payments: the 105-day rule and the mistakes that break a GRAT

How a GRAT works, in one paragraph

The grantor moves assets into an irrevocable trust and keeps the right to a fixed annuity for a set number of years. The taxable gift is the value of the assets minus the present value of that annuity, calculated with the IRS Section 7520 rate for the month of the transfer (or, if you elect, either of the two months before). That rate is 120% of the federal mid-term rate, rounded to the nearest two-tenths of a percent; for October 2026 it is 5.6%. If the assets grow faster than that rate, the growth passes to the remainder beneficiaries at the end of the term with little or no gift tax. Many GRATs are designed so the gift at the start is close to zero.

The design is the attorney’s job. The administration, year after year, usually falls to a family member serving as trustee. That is where most problems start.

The rules the trustee has to follow every year

These rules come from the Treasury regulations on qualified annuity interests (26 CFR 25.2702-3). A GRAT that stops meeting them can lose the favorable gift calculation the whole plan was built on.

Paying with assets instead of cash

Many GRATs hold a single stock or a family business interest and don’t have cash for the payment. If the trust document allows it, the trustee can pay the annuity in kind, by transferring assets back to the grantor, but the value has to be right on the day of the payment.

• Publicly traded shares are typically valued at the mean of the high and low trading prices on the payment date.
• Private company interests generally need a supportable valuation, often from an appraiser.
• Keep the lot and basis records. Which shares went back to the grantor, and their cost basis, matters for future capital gains on both sides.
• Document the transfer with a short trustee memo and the account statements that show it moved.

If the grantor dies during the term

If the grantor dies before the annuity term ends, the regulations include in the estate the part of the trust needed to produce the annuity, measured at the Section 7520 rate at the date of death and never more than the trust’s value then. In many cases that is most or all of the trust, which undoes the planning. It’s one reason many families use shorter GRATs, and why the trust should name what happens to the remaining payments.

A yearly GRAT checklist

1. Put each anniversary date and the 105-day deadline on a shared calendar, with reminders well before the deadline.
2. Confirm the annuity amount from the trust document, not from memory or last year’s check.
3. Decide cash or in kind early enough to get a valuation if one is needed.
4. Make the payment from the trust’s own account, and keep the statement that shows it.
5. Write a one-page trustee record of the date, the amount, the assets used and their value.
6. Make sure nothing new goes into the trust.
7. Give the CPA the year’s records for the grantor’s income tax return.
8. At the end of the term, distribute what remains as the trust document directs.

Common questions