To calculate a GRAT annuity payment, divide the fair market value of the assets you transferred into the trust by an annuity factor built from the IRS Section 7520 rate and the trust term. The annuity factor equals (1 − (1 + r)−n) ÷ r, where r is the 7520 rate as a decimal and n is the number of years. Set the payment at that quotient and the present value of your annuity stream equals what you put in, which zeroes out the taxable gift.
The Three Inputs You Need
Fair Market Value on the Funding Date
The calculation starts with what the assets are worth the day you fund the trust. For publicly traded stock or cash, use the closing price or the account balance. For a private business interest, real estate, or artwork, you need a qualified appraisal. The IRS requires the appraiser to hold a recognized professional designation or meet minimum education and experience requirements, to regularly perform compensated appraisals, and to have verifiable expertise in the specific type of property.1Legal Information Institute. 26 USC 170(f)(11) – Definition: Qualified Appraisal Appraisals for private business interests typically run between $5,000 and $50,000 depending on complexity.
The Trust Term
You choose how many years the trust will last. Terms commonly range from two to ten years, with two being the shortest practical choice. The term drops directly into the annuity factor formula, so it shapes every other number that follows. Shorter terms produce larger annuity payments; longer terms produce smaller ones and give the assets more time to compound inside the trust.
The Section 7520 Rate
The Section 7520 rate is the IRS’s assumed rate of return on the trust assets. It equals 120% of the federal mid-term rate, rounded to the nearest two-tenths of one percent, and the IRS publishes a new rate each month in its revenue rulings.2Office of the Law Revision Counsel. 26 USC 7520 – Valuation Tables For February 2026, the rate is 4.6%.3Internal Revenue Service. Revenue Ruling 2026-3 The rate matters beyond the math: any growth above it passes to your beneficiaries free of gift and estate tax, so a lower rate makes the hurdle easier to clear.
For transfers that include a charitable component, the statute lets you use the rate from the funding month or either of the two preceding months.2Office of the Law Revision Counsel. 26 USC 7520 – Valuation Tables Check the current revenue ruling before finalizing your trust documents.
The Annuity Factor Formula
The annuity factor converts a stream of equal annual payments into a single present value. For a level annuity, the formula is:
Annuity Factor = (1 − (1 + r)−n) ÷ r
Here r is the Section 7520 rate as a decimal and n is the trust term in years. The IRS publishes pre-calculated factors in Table B of its actuarial tables, available on the IRS website and in Publication 1457.4Internal Revenue Service. Actuarial Tables You can look the factor up instead of calculating it, but the underlying arithmetic is short.
Once you have the factor, the payment is:
Annual Payment = Fair Market Value ÷ Annuity Factor
Setting the payment this way makes the present value of the full annuity stream equal the value of what you contributed. The remainder gift is zero, or close to it after rounding. That is the “zeroed-out” structure the Tax Court upheld in Walton v. Commissioner in 2000.
Worked Example: A Two-Year Level Annuity
Suppose you fund a GRAT with $1,000,000 in stock, choose a two-year term, and the applicable Section 7520 rate is 4.6%.
Start with the annuity factor:
(1 − (1.046)−2) ÷ 0.046 = (1 − 0.9140) ÷ 0.046 = 0.0860 ÷ 0.046 ≈ 1.870
Then divide the trust value by the factor:
$1,000,000 ÷ 1.870 = $534,759 per year
The trust pays you $534,759 at the end of year one and $534,759 at the end of year two. Discount those two payments back at 4.6% and their combined present value is $1,000,000, so the taxable gift is roughly zero.
What happens to the assets in the trust illustrates why the calculation matters. If the trust’s investments actually return 8%, the balance after year one is $1,080,000. Subtract the first payment and $545,241 remains. That grows to $588,860 by the end of year two. Subtract the second payment and about $54,100 is left. That remainder passes to your beneficiaries free of gift and estate tax. The wider the gap between the actual return and the 7520 rate, the more wealth moves out of your estate.
Graduated Annuity Payments
You can also structure the annuity so each year’s payment is larger than the last. Treasury regulations allow this as long as no year’s payment exceeds 120% of the preceding year’s amount.5eCFR. 26 CFR 25.2702-3 – Special Valuation Rules for Qualified Annuity Interests In practical terms, each payment can be up to 20% larger than the one before it.
The appeal of graduated payments is that smaller distributions early leave more assets inside the trust during the years when compounding does the most work, which can increase the remainder your beneficiaries receive. The calculation gets more involved: you compute a separate present value for each year’s payment rather than using a single annuity factor, and the total of those present values still has to equal the fair market value of the contributed assets. Estate planning software or an attorney’s actuarial tools handle the arithmetic, and the resulting schedule is written into the trust as a binding obligation.
Checking the Remainder Gift
Under Section 2702, the IRS values your retained annuity interest using the Section 7520 rate and subtracts it from the fair market value of what you transferred; whatever is left is the taxable gift.6Office of the Law Revision Counsel. 26 USC 2702 – Special Valuation Rules in Case of Transfers of Interests in Trusts In a zeroed-out GRAT, the subtraction should yield zero or a negligible amount. That preserves your lifetime gift tax exemption, which sits at $15,000,000 per individual for 2026 after the passage of the One, Big, Beautiful Bill Act.7Internal Revenue Service. What’s New – Estate and Gift Tax
If the annuity payments are set too low, the retained interest is worth less than the contributed assets and the difference becomes a taxable gift that consumes exemption. Verify the payment schedule against the funding valuation and the 7520 rate before signing the trust documents. Small valuation errors can produce a gift value large enough to matter.
Why Term Length Isn’t Purely a Math Choice
The calculation gives you the payment for any term you pick, but the term also carries a mortality risk. If you die before the annuity term ends, Section 2036(a) pulls the full value of the trust assets back into your taxable estate, not just the remaining payments.8eCFR. 26 CFR 20.2036-1 – Transfers With Retained Life Estate The Ninth Circuit confirmed this in 2020. That risk is why many planners choose two- or three-year terms even though longer terms allow more compounding, and it is also why GRATs are a poor vehicle for skipping a generation: the estate tax inclusion period rule prevents you from allocating generation-skipping transfer tax exemption to the trust during the term.9Internal Revenue Service. Instructions for Form 706-GS(T)
Reporting the Calculation on Form 709
You report the transfer on IRS Form 709 for the year you fund the trust.10Internal Revenue Service. Instructions for Form 709 (2025) On Schedule A, Part 1, list the transferred assets with enough detail for the IRS to identify them and their fair market value on the funding date.11Internal Revenue Service. Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return For the first transfer to a GRAT, attach a certified or verified copy of the trust instrument. For later transfers, a brief description of the trust terms is enough.
The return also shows the calculated remainder value, which is the whole point of running the annuity math correctly. Run the actuarial factors against the applicable 7520 rate one more time before filing. If the IRS later determines the payments were too low, the remainder increases and the exemption you thought you preserved is gone.