Grantor Retained Annuity Trust GRAT Law and Legal Definition

Grantor Retained Annuity Trust or GRAT refers to an irrevocable trust into which the grantor transfers property in exchange for the right to receive fixed payments at least annually, based on original fair market value of the property transferred. At the end of the term, any remaining value in the trust is passed on to a beneficiary of the trust as a gift. Thus when the trust expires the beneficiary receives the assets tax free. The beneficiary must be a family member of the donor. If the donor dies before the end of the term, then the value of the trust at that time is passed on to the beneficiary.

GRAT is commonly used in the U.S to make large financial gifts to family members without paying a gift tax. In order to be valid the trust must comply with the requirements of Internal Revenue Code.