MSTR Cat

Trust Law/Level V · Tax and legacy/5.2 Annuity and unitrust structures/Lesson 2

GRUTs: grantor retained unitrusts

How a grantor retained unitrust pays a fixed percentage of the trust’s value each year, and why GRUTs are used less than GRATs to pass growth to family.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. If the estate is under the 2026 basic exclusion of $15,000,000, neither a GRUT nor a GRAT is needed, and keeping assets until death preserves the §1014 basis step-up; check state estate tax, which starts at $1,000,000 in Oregon.
  2. To pass growth to family, a GRAT usually beats a GRUT, because a fixed annuity leaves growth above the §7520 rate (5.6% in October 2026) in the trust; a GRUT’s rising payments send much of that growth back to the grantor.
  3. A GRUT suits a grantor who wants to keep adding to one trust, since the regulations bar additions only for GRATs; each addition is a further gift reported on Form 709, and the trustee must revalue the assets every year.
  4. To keep costs down, fund a GRUT with listed securities rather than private shares or real estate needing yearly appraisals; the document must still correct payments if a value was wrong (Treas. Reg. §25.2702-3), and death during the term triggers §2036 inclusion.

MaterialsA copy of the GRUT document you are reading, if you have one, to find the unitrust percentage, term and valuation dateThe text of Treas. Reg. §25.2702-3, free on law.cornell.eduThe IRS’s current table of §7520 interest rates, free on irs.govLesson 5.2.1, on GRATs

Wonder

  1. Can more assets be added to a GRUT after it starts?
  2. Why does a GRUT’s payment change each year when a GRAT’s does not?
  3. Why are GRUTs used less often than GRATs to pass growth to family?

Explore

  1. A grantor retained unitrust (GRUT) is an irrevocable trust in which the grantor keeps the right to a fixed percentage of the trust’s value, recalculated each year, for a term of years; the remainder then passes to the beneficiaries. Under US federal gift tax law, IRC §2702 treats this ‘qualified unitrust interest’ as having value, so the gift is the assets’ value minus the present value of the retained unitrust, computed with the §7520 rate. A GRAT, by contrast, pays a fixed amount (lesson 5.2.1).
  2. Treas. Reg. §25.2702-3 defines a qualified unitrust interest as a fixed percentage of the net fair market value of the trust assets, determined annually and paid at least annually. The percentage can rise by no more than 120% of the previous year’s percentage. The document must also say how to correct payments if the trust’s value was determined incorrectly. Because the payment follows the trust’s value, it grows when the assets grow and shrinks when they fall.
  3. This is the main reason GRUTs are used less than GRATs to pass growth to family. In a GRAT, growth above the §7520 rate stays in the trust because the annuity is fixed. In a GRUT, part of every gain flows back to the grantor through larger payments, so less passes to the remainder beneficiaries. Reducing a GRUT’s gift close to zero also takes a very high payout percentage, which returns most of any growth to the grantor.
  4. Additions are treated differently. The regulations require a GRAT’s document to prohibit additional contributions, but they contain no such requirement for a GRUT, so a GRUT can be drafted to accept further gifts during its term; the remainder portion of each addition is a further gift. Mortality risk is the same as for a GRAT: if the grantor dies during the term, IRC §2036 includes the part of the trust needed to produce the unitrust payment, up to the whole trust (Treas. Reg. §20.2036-1(c)(2)).
  5. A GRUT also takes more administration. The trustee must value all the trust assets every year to set that year’s payment. Listed securities are easy to value; a share of a private company or real estate usually needs an appraisal, which adds cost, and any error must be corrected under the document’s adjustment clause. A GRAT’s payment is fixed, so it needs no yearly valuation to set the amount, although assets used to pay the annuity in kind must still be valued when they are paid out.
  6. Like a GRAT, a GRUT is usually a grantor trust for income tax (IRC §§671–679), so the grantor pays tax on its income. Which design, if either, fits a family depends on the assets, the grantor’s need for cash, the §7520 rate and the grantor’s health and age, and many families use neither. Rules and rates change, so check the law for the year in question. This lesson explains how GRUTs work and how they differ from GRATs; it does not suggest using one.

Key facts

  • Treas. Reg. §25.2702-3 defines a qualified unitrust interest as a fixed percentage of the trust’s net fair market value, determined annually and paid at least annually.
  • A GRUT’s gift is the value transferred minus the present value of the retained unitrust interest, computed with the §7520 rate.
  • The regulations require a GRAT to prohibit additional contributions but impose no such requirement on a GRUT.
  • Because GRUT payments rise as the assets grow, part of any growth returns to the grantor instead of passing to the remainder beneficiaries.
  • If the grantor dies during the term, §2036 includes the part of the trust needed to produce the unitrust payment, up to the whole trust.
  • A GRUT’s governing instrument must provide for correcting payments if the trust’s value was determined incorrectly (Treas. Reg. §25.2702-3).

Exercise nine, six, three, one

9CollectList up to 9 facts about a GRUT you are reading about (some lists are shorter), such as the assets transferred, their value, the unitrust percentage, the term, the valuation date, any later additions or the remainder beneficiaries.
6ClusterSort them into 6 categories: assets, valuation, payment terms, term length, additions, and people involved.
3DistillReduce the 6 categories to 3 groups: facts that set the initial gift, facts that change each year, and facts you would ask the trustee or an adviser about.
1CrystallizeWrite 1 sentence explaining, in your own words, why a GRUT passes less growth to the remainder beneficiaries than a GRAT holding the same assets.

Fact check

Dates, figures and claims checked against the published sources listed below.

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS