Holding a large position in one stock can be both a risk and an opportunity. Maybe you built a company and still hold a founder’s stake, or perhaps years of equity compensation turned into a position that now dominates your net worth.
Either way, a concentrated position can raise two questions at once:
- How do you manage the risk?
- How do you pass that wealth to the next generation without handing over a large share of it in taxes?
A Grantor Retained Annuity Trust, or GRAT, can be used to address both questions. In this guide, we’ll walk through how a GRAT works, why the current rate environment can make GRATs worth considering for concentrated stock, and what to consider before using one.
The Concentrated Stock Challenge
A concentrated position ties a large part of your future to one company’s performance. Citi Private Bank uses 10% or more of total wealth in a single stock as a common rule of thumb for what counts as concentrated; many executives and founders are well above that.
Selling the stock outright can trigger a large capital gains bill, and some holders face restrictions on when and how much they can sell, whether from lockup agreements, insider trading rules, or a desire to keep voting control.
When considering a concentrated stock position through the lens of estate planning, certain strategies can help alleviate the tax burden on your heirs. A GRAT can be one of those strategies.
What Is a GRAT?
A GRAT is an irrevocable trust. You, the grantor, contribute assets, often shares of a concentrated stock, to the trust for a set term, commonly two to ten years. In exchange, the trust pays you an annuity for that term. The annuity payments are calculated so that the present value of what you receive back equals close to the value of what you put in, based on an IRS-published rate called the Section 7520 rate.
If the assets in the trust grow faster than that 7520 rate, the excess growth passes to your beneficiaries at the end of the term with no further gift tax, because the gift was valued and reported when the trust was funded. If the assets grow at or below that rate, the annuity payments return the trust assets to you and little or nothing is left for your beneficiaries. You end up holding roughly what you would have held had you never funded the trust, less the legal, administrative, and any valuation costs of creating and running it. The larger risk is dying during the term. In that case the trust assets are pulled back into your taxable estate, the planning benefit is lost, and the costs are sunk. A properly drafted GRAT directs the assets back to your estate or to a trust for your spouse in that event, so your existing estate plan still controls them.
The Impact of Our Current Environment
The Section 7520 rate for August 2026 is 5.20%, as published in IRS Revenue Ruling 2026-13, meaning your GRAT assets need to outperform 5.20% for anything to pass to beneficiaries. A single volatile stock, particularly one with a history of sharp upward moves, can have a real shot at clearing that hurdle in a given term, even though no outcome can be guaranteed.
The 2026 lifetime gift and estate tax exemption also plays a role here. Following the One Big Beautiful Bill Act, the exemption is set at $15 million per individual, or $30 million for a married couple, and this level is now permanent rather than scheduled to sunset. A properly structured GRAT can be designed so it uses very little of that exemption, since the annuity payments are set to return most or all of the contributed value to you, which can make a GRAT appealing for investors who want to preserve their exemption for other planning while still working on transferring appreciation from a concentrated position.
Rolling GRATs
Advisors may recommend a series of short-term GRATs, often two years each, rather than one long-term GRAT, called a rolling GRAT strategy. Each time an annuity payment comes back to the grantor, it can be used to fund a new, short-term GRAT. Shorter terms can reduce mortality risk, since the grantor generally needs to survive the full term for the tax benefits to apply, and they can give the strategy more chances to capture short bursts of volatility in a concentrated stock.
What to Consider Before Using a GRAT
A GRAT can be a powerful strategy for managing a concentrated stock position, but it isn’t the right fit for every situation:
- The grantor generally needs to survive the trust term. If the grantor dies during the term, the assets can be pulled back into the taxable estate, which can undo the intended benefit.
- A GRAT is typically structured as a zeroed-out GRAT, meaning it is not designed to make efficient use of the generation-skipping transfer tax exemption. Assets passing to grandchildren or later generations may need additional planning layered on top.
- The strategy depends on the assets outperforming the 7520 rate. A stock that underperforms or stays flat during the term is not likely to produce a benefit beyond returning what was contributed.
- Because the trust is irrevocable, contributed shares are generally locked in for the term. This can matter for investors who may want or need liquidity, or who hold restricted or control shares subject to specific transfer rules.
Is a GRAT Worth Exploring?
For an investor holding a concentrated stock position, particularly one with volatility and appreciation potential, a GRAT can be worth discussing with an advisor and estate planning attorney. The current 7520 rate, the permanent higher exemption, and your own outlook on the stock all factor into whether the structure makes sense for your goals.
If you are sitting on a concentrated position and thinking through your options, our team can walk through whether a GRAT, or another strategy, fits your broader plan.
