Overview

GRATs and SLATs are estate-planning trusts that serve two complementary goals: shift future appreciation out of a taxable estate and preserve cash or access for family members across generations. In practice, I’ve used shorter-term “zeroed-out” GRATs to move rapidly appreciating assets and SLATs to keep liquidity available to a spouse without increasing the grantor’s estate. Both tools are irrevocable and require careful drafting to avoid unintended tax, creditor, or family-law consequences.

(For background on federal estate and gift tax mechanics and filing requirements, see the IRS estate and gift tax overview and Form 709 guidance.)

How a GRAT works (practical mechanics)

  • Funding and annuity: The grantor funds the GRAT with assets (stocks, business interests, real estate). The trust pays the grantor an annuity or fixed-dollar stream for a set term. The annuity schedule is determined at the start and cannot be adjusted mid-term.

  • Valuation and the IRS Section 7520 rate: The gift-tax value of the remainder interest is calculated using the IRS Section 7520 rate in effect for the month the trust is funded. That rate determines the present value of the annuity payments and the remainder. If the trust assets outperform the Section 7520 assumption, the excess passes to beneficiaries free of additional gift tax.

  • Zeroed-out GRATs: A common strategy is a “zeroed-out” GRAT, where the annuity is set so the present value of the retained payments equals the value of the assets, producing a minimal taxable gift at funding. If assets grow beyond the assumed rate, beneficiaries receive value with little or no gift tax cost.

  • Key tax traps: If the grantor dies during the GRAT term, the remaining trust assets are includible in the grantor’s estate — nullifying the intended transfer. Also, illiquid assets can create trouble if the trust must make annuity payments; planners typically fund with or add liquid assets or structure distributions accordingly.

(See IRC §7520 and IRS guidance on estate and gift taxes for valuation and reporting.)

How a SLAT works (practical mechanics)

  • Structure: One spouse (the grantor) irrevocably transfers assets into a trust for the benefit of the other spouse and, often, descendants. The beneficiary-spouse can receive distributions per the trust terms.

  • Estate removal: Because the grantor no longer owns the transferred assets, those assets are generally excluded from the grantor’s taxable estate. At the same time, the beneficiary-spouse can access trust income or principal subject to fiduciary discretion or distribution standards written into the trust.

  • Access without control: A well-drafted SLAT provides meaningful access for the beneficiary-spouse while maintaining the grantor’s estate reduction. Grantor trust status and tax reporting can be designed for income tax efficiency (many SLATs are drafted to be grantor trusts for income tax purposes, shifting income tax burden away from the trust and avoiding trust-level taxation).

  • Practical considerations: SLATs are irrevocable; the transfer is a completed gift for gift-tax purposes and may require Form 709 reporting. If spouses create mirror SLATs (each spouse funds a SLAT for the other) or identical provisions exist, watch the reciprocal trust doctrine — courts and the IRS may recharacterize reciprocal transfers to the detriment of the intended tax result.

When to use GRATs vs. SLATs — and when together

  • Use a GRAT when you want to transfer expected future appreciation of specific assets (startups, concentrated stock positions, family businesses) with minimal immediate gift tax. GRATs are especially attractive when the Section 7520 rate (the IRS assumed rate) is low relative to expected asset growth.

  • Use a SLAT when you want to remove significant assets from your estate while preserving spouse access and maintaining family flexibility. SLATs are useful where spouses have asymmetric wealth or where life-insurance/dynasty-trust planning is part of the design.

  • Coordinated approach: A common multi-generational play is to run staggered, short-term GRATs to shift growth, then fund a SLAT or dynasty trust with other assets to hold wealth long-term for grandchildren and beyond. Life insurance inside an Irrevocable Life Insurance Trust (ILIT) or appropriately funded SLAT can provide liquidity for estate taxes or equalization among heirs.

(For related trust structures and dynasty trust techniques, see our piece on leveraging grantor trusts for estate tax efficiency.)

Practical examples and numbers (illustrative)

  • GRAT example (simplified): You fund a 3-year zeroed-out GRAT with $1,000,000 of concentrated stock. The Section 7520 rate at funding is 3%. If the asset grows at 10% annually, the excess value at term end flows to beneficiaries with only a nominal reported gift at funding. If the grantor dies during the 3-year term, however, the remainder returns to the estate.

  • SLAT example (simplified): Spouse A transfers $2,000,000 (invested in an income-producing portfolio) to a SLAT for Spouse B and descendants. Spouse B has discretionary access for income and principal; the assets and future appreciation are outside Spouse A’s estate. The transfer requires gift-tax reporting and uses part of Spouse A’s lifetime exemption unless offset by other planning.

Design and drafting considerations (what I watch for in client engagements)

  1. Asset selection: Fund GRATs with assets expected to appreciate (not low-return cash). Use liquid assets or a side reserve for annuity payments.
  2. Term length: Shorter GRATs (2–4 years) reduce mortality risk if the grantor dies; they also rely more on strong near-term appreciation. Longer terms increase death risk but can let slowly appreciating assets accrue growth.
  3. Section 7520 timing: The applicable 7520 rate is published monthly by the IRS and materially affects GRAT math; planners sometimes time funding to lock a favorable rate.
  4. Reciprocal trust risk: Avoid mirror or substantially identical SLATs without careful drafting and legal review to reduce recharacterization risk.
  5. State law and divorce: SLATs involve family-law risk — if the beneficiary-spouse divorces, trust distributions can be implicated in settlement negotiations depending on jurisdiction and trust design. Also consider state estate and income tax rules.
  6. Generation-skipping transfer (GST) planning: If your goal includes grandchildren, allocate GST exemption where appropriate to avoid a later GST tax bite.
  7. Creditor protection vs. access: Decide whether to build in spendthrift provisions and distribution standards (e.g., ascertainable standard) that balance protection with spouse access.

Common pitfalls and how to avoid them

  • Funding illiquid assets into a GRAT without liquidity for annuity obligations — solution: reserve cash or use promissory notes that the trust can call.
  • Dying during a GRAT term — solution: use shorter terms and staggered GRAT series; evaluate life expectancy and mortality risk.
  • Reciprocal SLATs and accidental constructive gifts — work with counsel to vary provisions and funding times; consider alternative non-reciprocal planning to achieve the economic goals.
  • Overlooking Form 709 and gift-tax reporting — every taxable gift must be reported by the donor on Form 709 (see IRS Form 709 instructions).

Implementation checklist (practical steps)

  • Inventory assets and identify candidates for GRAT vs. SLAT funding.
  • Coordinate with estate counsel, tax advisor, and investment manager on valuations and liquidity.
  • Decide on GRAT term and annuity schedule; check the Section 7520 rate before funding.
  • Draft SLAT language to avoid reciprocal-trust concerns and account for state law/divorce risk.
  • File Form 709 in the year of any taxable gift and consider GST allocation choices now if dynasty planning is desired.
  • Review and update other estate documents (wills, powers of attorney, beneficiary designations) so trust plans integrate with the overall plan.

Frequently asked operational questions

  • Will income tax remain at the grantor level for grantor trusts? Often yes; many SLATs are structured as grantor trusts for income tax purposes, which can be beneficial but comes with complexity.
  • Can I revoke a GRAT or SLAT? Generally no — these are irrevocable once properly funded. Beware planning that assumes reversibility.

Further reading and internal resources

Authoritative sources

Professional disclaimer

This article is educational and does not replace individualized legal, tax, or financial advice. Gift and estate tax rules change and interact with state law and personal circumstances. Consult a qualified estate-planning attorney and tax advisor before implementing GRATs, SLATs, or related techniques.