The “Walton” Strategy: Zeroed-Out GRATs
The “Walton” Strategy: Zeroed-Out GRATs
Heads I win, Tails I tie. How to transfer stock appreciation to your heirs tax-free with mathematically zero downside risk.
Executive Summary
- The Concept: You put $10M into a GRAT for 2 years. The trust pays you back an annuity equal to $10M plus a small IRS interest rate (7520 Rate, e.g., 4%). If the assets grow at 4%, you get everything back (No harm done).
- The Arbitrage: If the assets grow at 20%, the trust pays you back the $10M + 4% interest, and the excess 16% growth goes to your children instantly, free of Gift Tax and Estate Tax.
- “Zeroed-Out”: You structure the annuity payments so that the actuarial value of the “gift” to your children is exactly $0. This means you use none of your Lifetime Exemption. If the stock crashes, the trust simply fails and returns assets to you. You lose nothing but the attorney fees.
The Mortality Risk
The Catch: If you die during the GRAT term (e.g., within the 2 years), the assets claw back into your taxable estate, undoing the strategy. Therefore, successful GRATs are typically short-term (2 years) to minimize the risk of death during the term.
Mechanic: The Hurdle Rate Race
Hurdle Rate
IRS 7520 Rate
Upside
Goes to Heirs
Downside
Returns to You
Gift Tax
$0.00
Simulation: 2-Year GRAT vs. Direct Holding ($10M Tech Stock, 30% Boom)
Wealth Transfer Outcome
| Feature | IDGT (Sale) | GRAT (Annuity) |
|---|---|---|
| Term | Long-term / Dynasty | Short-term (Usually 2-5 Years) |
| Interest Rate | AFR (Mid/Long-term) | 7520 Rate (120% of Mid-term) |
| GST Exemption | Can allocate immediately | Cannot allocate until GRAT ends (ETIP) |
Volatility is the enemy of investing, but the best friend of a GRAT. A highly volatile stock that pops 50% in one year is the perfect candidate to flush massive value out of your estate for free.”
Essential Resources
INTERNAL
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