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Estate freezes: GRATs & sales to grantor trusts (IDGTs)
GRATs under 1990 law· Legal document or tool
Depends on youExperts differ; the right answer depends on your situation.
Advanced irrevocable trusts that lock today's value into your estate and shift future growth, such as a building's appreciation, to heirs.
See it on the Personal Finance & Estate map →How it works
A GRAT (grantor retained annuity trust) holds assets for a short term, often two years, and pays you back their value plus an IRS hurdle rate; growth above that passes to heirs with little or no taxable gift. In an IDGT sale, you sell assets, often discounted LLC units, to an irrevocable 'grantor' trust for a note at the IRS minimum interest rate. You keep paying the trust's income tax, which quietly shifts more wealth tax-free.
Why it matters for you
Depends on you: mainly for estates above the $15 million-per-person exemption. Traps include dying during a GRAT term, weak appraisals and lost step-up. Estate attorney and appraiser territory.
Think of it like
Like selling a building to your kids on an installment note: if NOI growth beats the note rate, the upside lands with them.
Rules, limits and sources (2026)
IRC Sec. 2702 (1990) authorizes GRATs; the Tax Court's Walton decision (2000) approved 'zeroed-out' GRATs; IRS Revenue Rulings 85-13, 2004-64 and 2023-2 govern grantor-trust sales, tax payments and basis.
Watch out for
Congress has repeatedly proposed limiting GRATs and grantor trusts, including 2021 drafts; none passed, but the risk of future limits remains.
Connections (3)
▸Estate freezes: GRATs & sales to grantor trusts (IDGTs) are advanced forms of Irrevocable trustDepends on you
How they connect
GRATs and IDGTs are irrevocable trusts built to be 'grantor trusts': ignored for income tax, so the creator keeps paying the trust's tax, yet outside the estate for estate tax. That mismatch between code sections lets them move growth to heirs more efficiently than an ordinary irrevocable trust.
When it applies
Grantor-trust rules date to the 1954 code; attorneys developed 'defective' trusts as freeze tools from the 1980s onward.
How sure?
IRC Secs. 671-679, 2036 and 2702; IRS Revenue Ruling 85-13 treats sales to one's own grantor trust as nontaxable.
Watch out for
Whether Congress will close the income-tax/estate-tax mismatch that makes these work is open; 2021 drafts tried, then dropped it.
▸Estate freezes: GRATs & sales to grantor trusts (IDGTs) often hold discounted interests in Family LLC / family limited partnershipDepends on you
How they connect
Freezes work best with assets that can be discounted and are expected to grow. A family LLC holding a building fits: non-voting minority units are appraised at a discount, then sold to an IDGT for a note or put in a GRAT. Appreciation and cash flow above the note rate shift to heirs. California reassessment rules still apply.
When it applies
A common pairing among estate attorneys since the 1990s, especially for families holding commercial real estate.
How sure?
Cases such as Estate of Strangi (5th Cir. 2005) and Estate of Powell (Tax Court 2017) show IRS attacks under Sec. 2036; well-run LLCs often survive.
Watch out for
How large a discount courts will accept, and how much seed money an IDGT needs, remain unsettled. Attorney and appraiser required.
▸Estate freezes: GRATs & sales to grantor trusts (IDGTs) trade away Step-up in basis at deathWatch out
How they connect
Assets moved out of the estate keep their old low basis; IRS Revenue Ruling 2023-2 confirms no step-up at death for irrevocable grantor-trust assets. For a California owner, losing roughly 37% in capital-gains and recapture savings can outweigh the 40% estate tax avoided. Protection: a 'swap power' lets the grantor trade cash back for low-basis assets before death.
When it applies
A central trade-off once exemptions rose; the IRS settled the basis question in March 2023.
How sure?
IRS Rev. Rul. 2023-2; IRC Secs. 1014 and 675(4)(C), the substitution power; estate planners' published comparisons of estate versus income tax.
Watch out for
Whether a swap made shortly before death holds up, and how to time it if death is sudden, are practical uncertainties.