Periods of market volatility can be nerve-wracking—but for the savvy estate planner, they may also present a window of opportunity. One strategy worth considering during unpredictable markets is the use of a short-term Grantor Retained Annuity Trust (GRAT), especially when the value of certain assets has dipped.
A GRAT allows you to transfer appreciating assets—such as stocks or real estate—into a trust when their market value is temporarily low. If those assets rebound in value during the term of the trust, the gains can pass to your beneficiaries with little or no gift tax. The key is timing and a tolerance for risk, as returns are never guaranteed.
Typically set up for a term of two to four years, a short-term GRAT requires the person funding the trust to receive fixed annual payments—known as a retained annuity. Once the trust term ends, whatever remains in the trust (after those payments have been made) goes to the beneficiaries. If the trust’s investments outperform the IRS-prescribed interest rate during that period, your heirs may receive a meaningful tax-free gift.
However, if the assets underperform or you pass away before the trust ends, the trust property is simply returned to your estate. Your heirs would receive nothing—but neither would they incur a loss.
Each GRAT is measured against a set IRS interest rate, which has fluctuated between 4% and 6% since early 2023. Any return beyond that rate becomes a potential gain for your beneficiaries. If the assets don’t perform, everything reverts to you, making this a low-risk strategy for your heirs.
Contrast this with a direct gift: if the asset’s value drops after the gift is made, you’ve paid gift tax on a higher value than what your heirs actually receive. Or, if you loan money to your children and their investments lose value, they’re still responsible for repaying the loan—even if they gained nothing.
Let’s say you transfer $1 million into a two-year GRAT, and it earns a 6% return each year:
This approach results in a modest taxable gift upfront. If the annuity amount were smaller, the taxable gift would be larger, and vice versa.
Keeping the GRAT short—just two years—is key to maximizing the chances of capturing gains while avoiding the offsetting effect of losses over time. A longer GRAT could see early gains canceled out by later losses, reducing the benefit to your heirs. In contrast, setting up multiple short-term GRATs every couple of years increases your chances of success—and decreases the likelihood that you’ll pass away before the trust ends.
Volatility Doesn’t Have to Mean Uncertainty
While market swings may cause anxiety, they also present an opening for estate planning strategies that preserve wealth across generations. If you’re curious about how GRATs or other techniques could work for your family, our experienced estate planning attorneys at The Werner Law Firm can help you evaluate your options.
If you have any questions, schedule a free appointment with us through our online appointment page.
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Reference: mondaq (June 12, 2025) “Estate Planning Amid Market Volatility: Leveraging GRATs”
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