A single grantor retained annuity trust carries a real risk: if the grantor dies before the trust term ends, the strategy generally fails to remove assets from the taxable estate. One common response, especially for holders of a single volatile stock position, is to use a series of short-term GRATs instead of one long-term trust. This is often called a rolling GRAT strategy.
How the rolling structure works
Rather than funding one GRAT with a ten-year term, a rolling GRAT strategy typically uses a new two- or three-year GRAT funded every year, sometimes using the annuity payments received from a prior GRAT to fund the next one. Each GRAT is valued independently using the Section 7520 rate in effect when it is created, and each one either succeeds or fails on its own depending on how the underlying stock performs during that particular term. Because the terms are short and overlapping, a single bad year in the market affects only one trust in the series rather than jeopardizing a single large, long-term bet.
This approach also reduces mortality risk. With a two-year term, the odds that the grantor survives the full term are generally much higher than with a ten-year term, which matters because dying during the GRAT term generally causes some or all of the trust assets to be included back in the grantor's taxable estate.
Practical considerations for a rolling strategy
- Short-term GRATs require frequent re-valuation and new trust documents, which means higher administrative and legal costs over time compared to a single long-term trust
- Volatility actually helps a rolling GRAT strategy, because the goal is to capture upside in strong periods while limiting the downside of any single term to that term's contribution
- Annuity payments received back from a GRAT are not themselves taxable events; because GRATs are typically structured as grantor trusts for income tax purposes, the grantor reports the trust's income and gains annually in any case
- Coordinating multiple GRATs with other lifetime gifting, including sales to an intentionally defective grantor trust, requires careful tracking of exemption use and trust administration
Who this strategy suits
Rolling GRATs tend to make the most sense for clients holding a single concentrated, volatile position, such as founder stock after a company goes public, where the family wants repeated opportunities to capture appreciation above the 7520 rate without committing to one long, riskier term. Because each GRAT is a distinct trust requiring its own administration, this strategy works best as part of a broader tax planning relationship rather than a one-time transaction.
If you're holding a concentrated stock position and want to explore whether a rolling GRAT strategy fits your situation, Marianna Schwartsman can help evaluate the trade-offs. Schedule a free consultation or call (212) 518-3868.
