The “Heads I Win, Tails I Tie” Bet: Zeroed-Out GRATs

The “Heads I Win, Tails I Tie” Bet: Zeroed-Out GRATs

How to transfer unlimited investment upside to your heirs tax-free, with zero downside risk if the investment fails. The strategy that built the Walton family fortune.

Dec 29, 2025 Code Authority: Team BMT RETIREMENT > ESTATE PLANNING

Executive Summary

  • The Concept: You put $10M of 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 $10M plus a small IRS interest rate (Section 7520 Rate).
  • The Magic (Zeroed-Out): You structure the payments so that the present value of what you get back equals exactly $10M. Mathematically, the “gift” to your heirs is valued at **$0**. Therefore, you use **$0 of your Lifetime Gift Exemption**.
  • The Payoff: If the asset grows *faster* than the IRS interest rate (e.g., 5%), the excess growth (the “Alpha”) goes to your children **Tax-Free**. If the asset drops in value, you just get your assets back in kind. You lose nothing but the legal fees.

The Mortality Risk

The Catch: You must survive the term of the trust (e.g., 2 years). If you die during the term, the assets are pulled back into your taxable estate, and the strategy fails (you are back to square one).
👉 The Fix (Rolling GRATs): Instead of one long 10-year GRAT, successful families stack a series of short, **2-year GRATs**. This minimizes the mortality risk and locks in gains frequently.

Mechanic: Beating the Hurdle Rate

0% Gift Tax
Zeroed-Out Gift
Hurdle Rate
IRS 7520 Rate
Upside Only
Heirs Keep Gains
Downside
Returned to You

Simulation: Pre-IPO Stock Pop ($10M Asset, 2-Year GRAT)

Outcome Based on Asset Performance
Stock Flat (0% Return)Transfer: $0
Trust pays annuity back to you using the shares. Trust ends empty. No harm done.
Stock Doubles (+100%)Transfer: $9.5M Tax-Free
You get your $10M + Interest back. The remaining $9.5M profit goes to kids instantly.
Gift Tax Paid$0.00
You moved nearly $10M of wealth without touching your lifetime exemption.
Feature Direct Gift Zeroed-Out GRAT
Gift Tax Risk Immediate (Uses Exemption) None (Calculated as $0)
If Asset Drops Exemption Wasted Exemption Preserved (Undo)
Ideal Asset Steady Growth High Volatility (Pre-IPO/Crypto)

“The GRAT is the only vehicle where volatility is your best friend. You are effectively buying a call option on your own assets for the benefit of your children, with the premium paid by the IRS’s low interest rates.”

Essential Resources

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