What Is a Zeroed-Out GRAT?

There is a strategy that entitles an individual to quickly transfer property assets without having to pay estate taxes. This technique was made more helpful by the latest law advancements. It is called the Zeroed Out Grantor Retained Annuity Trust (ZOGRAT).

A Zeroed-Out GRAT is a beneficiaries-free technique that allows the grantor’s children to transfer trust assets without a gift or an estate tax.

Let’s dive into the article to dig more into what ZOGRAT is.

What Is A Grantor Retained Annuity Trust (GRAT)?

Before we check out what a Zeroed Out GRAT is, let’s first see what a GRAT is.

GRAT, short for Grantor Retained Annuity Trust, is an asset and estate planning strategy that provides estate tax exemption to the next generation when they transfer appreciating assets.

How A GRAT Works

To benefit from Grantor Retained Annuity Trust (GRAT), you first need to contribute to a Retained Annuity Trust Grat and get annual payments from the annuity trust. Then, once the trust’s term expires, the initial contribution is paid back to the grantor trust holder.

The remaining assets obtained during the annuity term can be transferred to a surviving spouse or family member free of gift and other estate taxes.

What Are Zeroed-Out GRATs?

A Zeroed Out GRAT is a type of GRAT. An irrevocable trust grants the succeeding generation free of the federal estate tax. This tax exemption works so that there are no gift or estate taxes while passing on valuable assets.

How Zeroed-Out Grantor Retained Annuity Trusts (ZOGRATs) Work

The advantage of rolling Zeroed Out GRATS is that it significantly lowers estate tax exposure.

The main difference between a GRAT and ZOGRAT is that ZOGRATs have a higher fixed annuity payment. This is to enable the present value of the gift to reach zero. Zero-ing out a GRAT means there won’t be gift tax purposes.

But the catch here is that if you want to get the most out of Zeroed Out GRATs, your assets must have a faster growth rate than the IRS rate on the property remaining.

ZOGRATs expire when the person who created them passes away. All the investment gains and assets transferred to the trust during the annuity trust term will go to the beneficiaries without a taxable gift to the property moved.

For instance, you opt for a two-year short-term GRAT by contributing $10 million with two installments of $5 million each. Given that the current government interest rate is 3%, you’ll be able to get $5.22 million in one year, which is an excess to pass on to potential heirs.

All the extra asset development surpassing 3% interest rates will be liable to transfer to the inheritors without taxable estate.

What Happens When You Skip A GRAT Annuity Payment?

If a grantor fails to make GRAT annuity payments during the 105 days of a grace period, they will be transgressing the IRS 2702 Section.

The section states that no further contributions shall be entertained until the GRAT is established. In addition, annual payments have the potential to rise more than 120% from the previous trust year.


How is a zeroed-out GRAT different from GRAT?

A zeroed-out GRAT does not use the lifetime exemption of the grantor as long as the assets appreciate at the Sec. 7520 rates. Instead, it works so that it transfers an excess of the appreciation to the grantor for their estate. 

When do the beneficiaries get the assets?

Once the term of GRAT ends, the estate and property assets are transferred to the heirs selected by the grantor.

What are the stakes regarding GRAT?

● If you die during a GRAT’s term, the process becomes null and void and fails to minimize estate tax.

● The GRAT assets that you contribute failing to appreciate the expected value.

● The Internal Revenue Service (IRS) challenges the present transferred assets value.

As is summarized above, ZOGRAT allows exemption from estate tax purposes. The primary purpose of ZOGRAT is to transfer valuable assets as well as the value of the property without added taxes. This is one of the best estate plans for people with a vast fortune to transfer.


About the author

Andrew Clark