The Estate Freeze: Zeroed-Out GRATs
The Estate Freeze: Zeroed-Out GRATs
How billionaires transfer massive stock appreciation to heirs tax-free using the “Walton Strategy” and the IRS 7520 Hurdle Rate.
Executive Summary
- The Concept: You transfer assets (e.g., Pre-IPO stock) into a Grantor Retained Annuity Trust (GRAT) for a short term (e.g., 2 years). The trust pays you back an annuity equal to the initial value plus a small IRS interest rate (Section 7520 Rate).
- The “Zeroed-Out” Magic: By structuring the annuity payments to equal roughly 100% of the initial contribution, the taxable gift value becomes $0. You use none of your lifetime exemption.
- The Upside Transfer: If the asset grows faster than the IRS rate (e.g., stock jumps 20% while IRS rate is 4%), all that excess growth passes to your children Tax-Free. If the asset drops, you just get it back (No harm done).
The Mortality Risk
The Catch: You must survive the term of the trust (e.g., 2 years) for the strategy to work. If you die during the term, the assets are pulled back into your taxable estate. This is why “Rolling GRATs” (series of short-term trusts) are preferred over long-term ones.
Mechanic: The Wealth Flow
Grantor
Contributor
7520 Rate
IRS Hurdle
Annuity
Returned to You
Remainder
Tax-Free Gift
Simulation: Tech Stock IPO ($10M Contribution)
2-Year GRAT Outcome (Stock doubles to $20M)
| Scenario | Asset Performance | Outcome |
|---|---|---|
| Home Run | Growth >> IRS Rate | Massive Tax-Free Transfer |
| Base Hit | Growth > IRS Rate | Modest Tax-Free Transfer |
| Strike Out | Growth < IRS Rate | Assets Return to Grantor (No Loss) |
“Heads, I win (transfer wealth). Tails, I tie (get assets back). A GRAT is one of the few ‘no-lose’ bets in the tax code.”
Essential Resources
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