GRATs: An Unexpected Bridge to Philanthropy

Our Director of Estate Strategy, Dave Jones, JD, LLM, CFP®, shares how a Grantor Retained Annuity Trust (GRAT) can offer peace of mind for family priorities, and open the door to charitable giving.

 

When most people hear about GRATs, they often picture billionaires using clever legal structures to dodge estate taxes. Headlines tend to frame them as loopholes for the ultra-wealthy. And yes, GRATs are best suited to individuals with substantial wealth and highly appreciating assets. But that view misses a more human, and far more common, story.

In thoughtful wealth planning, GRATs often serve a deeper purpose. They’re not just tax tools. They’re emotional bridges. For many clients, GRATs help meet near-term family priorities, ease internal concerns, and unlock a broader vision—one that may include charitable giving.

Meeting Family Needs First: The Quiet Prerequisite to Charitable Giving
Even among those with the means and potential to be transformative givers, philanthropy isn’t always the first thing on their minds. It’s not a lack of generosity. Their focus is elsewhere: on family.

There’s a quiet, internal preoccupation with unresolved family needs:

• Have I provided enough for my children’s long-term security and opportunities?
• Should I make a gift now to support my sibling if they ever face unexpected needs?
• Should I set aside resources to support my grandchildren’s future before committing to a significant charitable gift?

These are not fleeting concerns. They carry real emotional weight that can keep clients anchored in the present. Even when there’s a genuine desire to give back, that intention often sits on the sidelines until family support feels complete.

In many cases, clients aren’t actively weighing charitable plans against family obligations. Philanthropy just doesn’t fully enter the picture until they feel settled, both financially and emotionally, about what they’re doing for loved ones. GRATs can be a surprisingly effective way to address this internal tension.

GRATs in Action: Meeting Family Needs Without Sacrificing Flexibility
A GRAT allows a person to transfer appreciating assets into a trust, retain annuity payments over a set term, and pass the remaining appreciation to beneficiaries—often family members—with minimal or no tax consequences.

GRATs work especially well for individuals with taxable estates and concentrated positions in high-growth assets, such as closely held business interests or technology stocks. These assets are ideal because even modest growth above the IRS’s assumed interest rate (the Section 7520 rate) can result in meaningful transfers outside the taxable estate.

The benefit? Clients can in many cases provide significant support for family in the near-term without needing to sell assets or tie up large amounts of cash. With that foundation in place, space can open up for longer-term goals and values-driven planning.

 

How GRATs Can Support Family and Philanthropy
Samantha’s story presents a hypothetical situation based on common planning scenarios; for illustrative purposes only.

Consider Samantha, a successful tech entrepreneur who built significant wealth through her company’s growth and early investments in the innovation economy. She has three adult children, two brothers, and several nieces and nephews pursuing college and professional educations. She also wanted to support first-generation college students and fund early-stage cancer research.

In many families, loved ones have different levels of comfort with giving. GRATs can help align those perspectives by addressing near-term family needs and making room for future generosity.

Despite her financial capacity, Samantha hesitated. She wanted to give roughly $5 million to each of her children, $3 million to each of her brothers, and $2 million to nieces and nephews—a total of $23 million in near-term support that would give her peace of mind. Even with the higher lifetime exemption of $15 million starting in 2026, making all of these gifts outright would trigger significant gift tax liabilities.

Working with her advisors, Samantha established a series of short-term rolling GRATs, funded with a concentrated position in a fast-growing tech stock. The GRAT structure allowed the assets’ appreciation to pass efficiently to her family with minimal tax exposure, preserving her broader financial plan.

Once her family support strategy was in place and successful, Samantha felt an emotional shift. She moved forward with a $10 million scholarship endowment and helped launch a cancer research institute—initiatives she had long intended to pursue but had put on hold.

The GRATs didn’t change her values. They simply gave her the peace of mind to act on them.

The Real Role of GRATs in Philanthropy
Despite their reputation as technical estate planning vehicles, GRATs can play a more personal role:

• They remove emotional barriers that quietly delay charitable giving
• They allow clients to support family without disrupting broader financial plans
• They provide structure and tax-efficiency, which in turn brings clarity and confidence

They aren’t the only option. Some clients choose to integrate other strategies to achieve their family and charitable goals. But in the right situations, GRATs can do more than simply transfer wealth or minimize taxes. They help clients move from uncertainty to purposeful action.

Planning With Purpose
GRATs aren’t magic. They must be carefully designed to comply with IRS rules and depend on performance of underlying assets. But when aligned with broader goals, they become more than just technical tools. They become bridges between questions and clarity, between responsibility and impact.

For many families, generosity begins with a simple question: have I done enough for the people I love?

In the hands of thoughtful clients and advisors, GRATs help answer that question. Once in place and successful, clients may find they’re ready to move beyond family giving.

And that’s what makes GRATs not just a tax strategy, but a meaningful bridge between stewardship and lasting impact.

 

 

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Important: The above does not take into account the particular investment objectives, financial situations, or needs of individual clients. Neither Bailard nor any employee of Bailard can give tax or legal advice. The contents of this document should not be construed as, and should not be relied upon for, tax or legal advice.