Initial GRAT Funding
- 1,000 shares
- $10/share
- Total initial value = $10,000
2‑year GRAT
You’re imagining a “zeroed‑out” GRAT, so the annuity is structured so that:
- You get back almost all $10,000 over 2 years
- Plus the IRS‑assumed growth at the 7520 hurdle rate
Let’s assume the hurdle rate is 4.6%.
A typical 2‑year zeroed‑out GRAT might have annuity payments like:
- Year 1: $5,200
- Year 2: $5,400
(These numbers vary slightly depending on exact actuarial tables, but this is the right scale.)
📈 Now the Stock Doubles to $20/share After Year 1
GRAT needs to pay you $5,200 in Year 1.
If the GRAT pays in stock, it simply distributes:
$5,200 / $20 =260 shares
So your intuition was right:
The GRAT gives you back ~260 shares, not cash.
No sale.
No capital gains.
No liquidity problem.
No loss of upside for the remaining shares.
📊 What Happens Next?
After Year 1:
- You contributed: 1,000 shares
- GRAT distributed: 260 shares
- GRAT still holds: 740 shares
If the stock continues to rise, the GRAT keeps the upside.
📈 Year 2 Example
Suppose the stock rises again to $30/share.
GRAT owes you the second annuity payment: $5,400.
If paid in stock:
$5,400 / $30 = 180 shares
After Year 2:
- Remaining shares in GRAT = 740 − 180 = 560 shares
Those 560 shares are the remainder that passes to your kids tax‑free.
If the stock is $30/share, that’s:
560 x 30= $ 16,800 tax‑free transfer
You put in $10,000.
You got back $10,600 in annuity payments.
Your kids get $16,800 tax‑free.
That’s the GRAT magic.
What happens to voting right of the stock?
Grantor can be the voting trustee of GRAT and beneficiary trust, but grantor cannot benefit financially from beneficiary trust.
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