A grantor retained unitrust, or GRUT, works by letting you move assets into an irrevocable trust, draw an annual payment equal to a fixed percentage of the trust’s value for a set number of years, and then pass whatever is left to your chosen beneficiaries at a reduced gift tax cost. Only the “remainder interest” — the portion your beneficiaries eventually receive — counts as a taxable gift, and the IRS discounts that value based on your retained payment stream and the Section 7520 interest rate in effect when you fund the trust. If the assets grow faster than the IRS assumed, that extra growth lands with your beneficiaries free of estate and gift tax.
The Three Moving Parts
Every GRUT has three. You are the grantor. You keep a unitrust interest, which is the right to annual payments. Your beneficiaries get the remainder interest, which is whatever sits in the trust when the term ends.
Once you fund the trust, the assets are no longer yours. In exchange, you receive a yearly payment equal to a fixed percentage of the trust’s total value, recalculated each year. Choose a 5% unitrust rate on a $2 million trust and you receive $100,000 in year one. If the trust grows to $2.4 million the next year, you receive $120,000. If it falls to $1.8 million, you receive $90,000. Payments ride with the portfolio. That is the defining feature of a unitrust.
The remainder is simply what is left when your payment term ends. Those assets pass to the people you named at the start. You cannot change beneficiaries, change the unitrust percentage, or unwind the trust later. Irrevocable means irrevocable.
How the Gift Tax Calculation Works
The structure exists to shrink the taxable gift. You are not taxed on the full value of what you put into the trust. The IRS treats the gift as only the present value of the remainder interest.
To get that number, the IRS subtracts the calculated present value of your retained unitrust payments from the fair market value of the assets you contributed. The larger your retained interest, the smaller the taxable gift.
Three variables drive the math:
- The Section 7520 rate. This is a discount rate the IRS publishes monthly, calculated as 120% of the federal midterm rate, rounded to the nearest two-tenths of a percent. For 2026, the rate has hovered between 4.6% and 4.8%. A higher 7520 rate assumes the trust will grow faster, which makes your percentage-based payments worth more on paper, which shrinks the remainder and lowers the taxable gift.1Internal Revenue Service. Section 7520 Interest Rates
- The unitrust percentage. A higher payout means you are retaining more value, which leaves less as a remainder gift.
- The term length. More years of payments means a larger present value for your retained interest and a smaller taxable gift.
You can use the 7520 rate from the month of funding or either of the two preceding months, which gives a small window to lock in a favorable number.
Why You Cannot Zero Out a GRUT
With a grantor retained annuity trust (GRAT), estate planners routinely set the annuity payment high enough that the present value of the retained interest equals the full value of the assets contributed, driving the taxable gift to essentially zero. A GRUT cannot do this. Because your payments are a percentage of a fluctuating trust value rather than a fixed dollar amount, the IRS valuation formula will always produce a remainder interest greater than zero, no matter how high you set the unitrust percentage or how long the term. A GRUT always produces a taxable gift. That built-in floor is why GRATs dominate modern estate-freeze planning and GRUTs occupy a narrower niche.
Setting Up and Funding the Trust
Creating a GRUT starts with an irrevocable trust agreement that fixes the unitrust percentage, the term, and the remainder beneficiaries. Once signed and funded, the terms are locked.
Meeting the Qualified Interest Rules
Your retained unitrust interest must qualify under Section 2702 of the Internal Revenue Code. If it does not, the IRS values your retained interest at zero, meaning the entire value of what you contributed is treated as a taxable gift and the tax benefit disappears.2Office of the Law Revision Counsel. 26 US Code 2702 – Special Valuation Rules in Case of Transfers of Interests in Trusts
To qualify, the trust must give you an irrevocable right to receive a fixed percentage of the trust’s net fair market value, recalculated annually, paid at least once per year. The trust cannot satisfy the payment by issuing a note, debt instrument, or any similar arrangement. It has to be an actual distribution. If the trust allows income above the unitrust amount to be paid to you, that excess is not treated as part of the qualified interest and will not reduce the taxable gift.3eCFR. 26 CFR 25.2702-3 – Qualified Interests
Choosing the Term
The term can technically be a fixed number of years or your lifetime, but a lifetime term defeats the purpose. If you retain income rights for life, Section 2036 pulls the entire trust value back into your taxable estate at death, which is exactly the outcome you were trying to avoid. Virtually every GRUT uses a fixed term of years.
Picking the right number is a balancing act. A longer term reduces the taxable gift at creation but increases the chance that you die before the term ends and the estate-inclusion penalty kicks in. Estate planners typically model several term lengths against actuarial life expectancy data.
Selecting Assets
A GRUT works best when the trust’s assets grow faster than the Section 7520 rate assumed. That spread, actual growth minus assumed growth, is what passes to your beneficiaries tax-free. Growth stocks, startup equity, and interests in a closely held business are natural candidates.
When you fund a GRUT with interests in a private business or other illiquid assets, the initial fair market value may reflect valuation discounts for lack of marketability or lack of control. A lower starting value means a smaller taxable gift. The IRS scrutinizes these discounts closely, and professional appraisers typically support them with empirical data from restricted stock studies and pre-IPO transactions. Courts have pushed back on discounts they consider excessive, so the appraisal needs to withstand challenge.
Filing the Gift Tax Return
Funding a GRUT is a completed gift of the remainder interest. You must file IRS Form 709 by April 15 of the year following the transfer. Transfers to a trust are future interests that are not eligible for the annual gift tax exclusion, so you must report the gift regardless of its size.4Internal Revenue Service. Instructions for Form 709 The taxable amount on that return is applied against your lifetime exemption. If it exceeds what you have left, you owe gift tax at up to 40%.
What Happens If You Die During the Term
This is the central risk. If you die before the trust term expires, Section 2036 pulls the trust assets back into your gross estate as though the transfer never happened.5Office of the Law Revision Counsel. 26 US Code 2036 – Transfers With Retained Life Estate The statute captures any property where the transferor retained the right to income and did not outlive that retained interest.
Estate inclusion wipes out the intended benefit. You used part of your lifetime exemption on the original gift, and the assets are now taxed in your estate anyway. The gift tax exemption you used gets credited back, so you are not double-taxed, but the planning produces no net savings. This is why modeling term length against mortality is the core risk management decision in every GRUT.
If Grandchildren Are the Beneficiaries
Name grandchildren or more remote descendants as remainder beneficiaries and the generation-skipping transfer (GST) tax enters the picture. The GST tax is a separate layer on top of the gift or estate tax, imposed at a flat 40% rate on transfers that skip a generation.6eCFR. 26 CFR 26.2641-1 – Applicable Rate of Tax
You can shield GRUT transfers from GST tax by allocating your GST exemption to the trust. The GST exemption equals the basic exclusion amount, the same figure used for estate and gift tax.7Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption Allocation is irrevocable, so be deliberate about which transfers receive it.
One wrinkle. When a GRUT remainder passes from a non-skip beneficiary (your child) to skip beneficiaries (your grandchildren), the transition can trigger what the code calls a taxable termination, imposing GST tax on the full value of the trust assets at that point. Careful drafting can mitigate this, but the interplay between GRUT structures and GST allocation is one of the more technical pieces of the planning, and a place where getting it wrong is expensive.
Running the Trust Year to Year
A GRUT is not a set-it-and-forget-it structure. The trustee has recurring obligations that matter for both compliance and the trust’s validity.
Annual Valuation and Payments
The trust assets must be valued at fair market value at least once a year, typically on the anniversary of the trust’s creation or at the start of the trust’s tax year. That valuation determines the payment: the trustee multiplies the fair market value by the unitrust percentage and distributes the result to you.3eCFR. 26 CFR 25.2702-3 – Qualified Interests Payments can be made annually, quarterly, or monthly, but at minimum once per year.
For publicly traded securities, the annual valuation is straightforward. For real estate, private business interests, or other hard-to-price assets, a professional appraiser is usually needed each year. Appraisal fees can run from a few thousand dollars to $10,000 or more depending on complexity, and they continue for the life of the trust.
Tax Return Filings
A GRUT is a grantor trust, which means you, not the trust, pay income tax on whatever the trust earns. The trust still has its own filings. The trustee files IRS Form 1041 to report the trust’s income and indicate that it is reportable on the grantor’s personal return.8Internal Revenue Service. About Form 1041, US Income Tax Return for Estates and Trusts The trustee may also need to file IRS Form 5227, the split-interest trust information return.9Internal Revenue Service. Split-Interest Trust Annual Return Form 5227
Paying income tax on earnings you do not fully receive is a feature of the structure. Each dollar of income tax you pay reduces your taxable estate without being treated as an additional gift, which effectively moves more value to the remainder beneficiaries tax-free.
Valuation Penalties
Getting the annual valuation wrong carries real consequences beyond incorrect payments. If the IRS determines that trust assets were undervalued on a gift tax return, it can impose a 20% accuracy-related penalty on the resulting tax underpayment.10Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments For assets that are genuinely difficult to value, a qualified independent appraisal is the best defense.
When the term ends, the trustee distributes the remaining assets to the beneficiaries, files final returns, and terminates the trust. The beneficiaries own the assets outright and the structure has done its job.