How to Draft a Grantor Retained Annuity Trust (GRAT) and File Form 709

To set up a Grantor Retained Annuity Trust, you draft an irrevocable trust instrument that satisfies 26 CFR 25.2702-3, fund it by retitling assets into the trustee’s name, obtain an EIN for the trust, and report the transfer to the IRS on Form 709 by April 15 of the year after you fund it. The trust pays you a fixed annuity for a set term; whatever remains at the end passes to your beneficiaries, and if the instrument is drafted correctly the taxable gift can be brought close to zero.

Draft the Trust Instrument

The instrument is the governing document, and every requirement below has to appear inside it. Miss one and the IRS values your retained interest at zero under Section 2702, turning the whole transfer into a taxable gift.¹

The Annuity

The instrument must give you an irrevocable right to a fixed amount, payable at least once a year. “Fixed amount” means either a stated dollar figure or a fixed percentage of the initial fair market value of the property transferred to the trust, as finally determined for federal tax purposes.² The annuity may increase from one year to the next, but not by more than 120 percent of the prior year’s payment. Many GRAT instruments use escalating annuities to keep more assets working inside the trust during the early years.

Using a percentage of initial fair market value rather than a flat dollar figure has a practical advantage: if the IRS later adjusts your valuation, the annuity adjusts with it. The instrument must include a provision requiring this recalculation, paralleling the rules for charitable remainder annuity trusts.²

The trustee cannot satisfy the annuity by issuing a note, option, or other debt instrument. Payment must come from actual trust assets, in cash or by distributing property in kind at its current fair market value.

Term, Parties, and Distributions

The trust term must be a fixed number of years. Name yourself as grantor, name the trustee, and designate the remainder beneficiaries who take whatever is left when the term ends.

One restriction is easy to overlook: the instrument must prohibit any distributions to anyone other than you during the annuity term.² No payments to beneficiaries, no discretionary distributions to family members. Everything either returns to you as an annuity payment or stays in the trust until the term expires.

Irrevocability and the Substitution Power

The trust must be irrevocable. Once you sign and fund it, you cannot take the property back or change the terms. That is what makes the arrangement work: you have genuinely parted with the assets, subject only to your annuity right.

Many drafters include a power of substitution under IRC Section 675(4)(C), which lets you swap trust assets for other property of equal value. The power keeps the trust classified as a grantor trust for income tax purposes, and it gives you flexibility to pull appreciated assets out before the term ends by replacing them with cash. If included, the instrument should specify that the power is exercisable in a nonfiduciary capacity and without anyone else’s approval.³

Sizing the Annuity and Choosing the Term

Three numbers determine the taxable gift: the fair market value of the assets you transfer, the trust term, and the Section 7520 rate for the month you fund the trust.⁴ The Section 7520 rate is 120 percent of the federal midterm rate, rounded to the nearest two-tenths of a percent, and the IRS publishes a new rate each month.⁵ As of early 2026, that rate is 4.6 percent.⁶ A lower rate makes your retained annuity’s present value smaller and the taxable gift larger; a higher rate does the opposite.

The most common approach is a zeroed-out GRAT, where the annuity is set high enough that its present value roughly equals the value of what you contributed. The taxable gift comes out near zero, and any growth above the Section 7520 hurdle rate passes to your beneficiaries free of gift and estate tax. Your attorney or actuary will run the numbers through the IRS valuation tables to fix the exact annuity.

Term length is a tradeoff. A shorter term with higher payments zeroes out more easily but gives assets less time to outperform the hurdle. A longer term captures more growth but exposes you to greater mortality risk (covered below). Many practitioners use rolling two-year GRATs in sequence to limit that risk while still capturing growth in shorter bursts.

Fund the Trust

Signing the instrument creates the legal structure. Funding it, by retitling assets into the trust’s name, is what makes it real. Until assets move, you do not have a functioning GRAT.

The mechanics depend on the asset:

Publicly traded securities require a stock power (a securities assignment) signed with a medallion signature guarantee from a bank or brokerage firm. Your brokerage will have its own transfer forms and will typically want a copy of the trust instrument or a certification of trust showing the trustee’s authority.
Real estate transfers require a new deed executed and recorded in favor of the trustee. County recording fees generally run from roughly $14 to several hundred dollars depending on location.
Closely held business interests transfer by an assignment of your membership, partnership, or stock interests, along with an update to the entity’s ownership records.

Every asset needs a fair market value determination as of the funding date. Publicly traded stock can use the closing price on the transfer date. Real estate, closely held businesses, and other hard-to-value assets need a qualified appraisal from an independent appraiser. That appraisal gets attached to your Form 709 and is essential for adequate disclosure.

Get an EIN

The trust needs its own Employer Identification Number from the IRS for tax reporting and to open accounts in the trust’s name. You can apply online at IRS.gov and receive the number immediately.⁷ Because a GRAT is a grantor trust, Regulation 1.671-4(b)(2) also permits a single-owner grantor trust to have payors issue 1099s in the grantor’s name under the grantor’s Social Security Number. Either way, the trust’s EIN should appear on your Form 709.

Report the Transfer on Form 709

Funding a GRAT triggers a gift tax reporting obligation. You report the transfer on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for the calendar year in which you funded the trust.⁸

Schedule A

The taxable gift goes on Schedule A. In the property description column, describe the transferred assets with enough specificity for the IRS to identify them: ticker symbols, share counts, common or preferred for securities; street address and legal description for real estate.⁹ Include the date of the transfer, the trust’s EIN, and the fair market value of the assets on the transfer date.

Report the present value of your retained annuity and subtract it from the total transfer value to arrive at the taxable gift. For a zeroed-out GRAT, that number should be near zero. Attach a statement showing the Section 7520 rate you used, the trust term, the annuity amount, and the calculation. The IRS needs to see how you got there.

Required Attachments

Attach to your Form 709:

A copy of the trust instrument, or a detailed description of its terms.
Qualified appraisals for any assets without a readily ascertainable market value.
A valuation statement showing the method and data used to calculate the present value of the retained annuity and the remainder interest.

These attachments support your reported values and satisfy the adequate disclosure requirements that start the IRS statute of limitations.⁹

Adequate Disclosure

Adequate disclosure matters more than most other decisions on this return. Without it, the IRS can challenge the GRAT’s gift tax value at any point in the future, because there is no statute of limitations until adequate disclosure is made. A properly disclosed gift starts a three-year limitations period.¹⁰ To qualify, the return must include a complete Form 709, a description of the property and any consideration received, the identity and relationship of the donor and each donee, the trust’s EIN, a description of the trust terms (or a full copy of the instrument), and either a qualified appraisal or a detailed explanation of your valuation method.

Deadlines and Extensions

Form 709 is due April 15 of the year after you fund the GRAT. If you funded the trust in 2025, the return is due April 15, 2026.⁹

An automatic six-month extension of your personal income tax return automatically covers Form 709; you do not need to file anything extra.¹¹ If you are not extending your income tax return but need more time for Form 709 alone, file Form 8892 by the original due date to get the same six-month extension.

Where to Mail

Mail your original Form 709 to:

Department of the Treasury
Internal Revenue Service Center
Kansas City, MO 64999¹²

Amended returns go to:

Internal Revenue Service Center
Attn: E&G, Stop 824G
7940 Kentucky Drive
Florence, KY 41042-2915¹²

Use certified mail with return receipt requested so you have proof of the filing date. There is no electronic filing option for Form 709.

Late Filing Penalties

If the GRAT produced a taxable gift and tax is owed, late filing carries a penalty of 5 percent of the unpaid tax per month or partial month, capped at 25 percent.¹³ A separate failure-to-pay penalty of 0.5 percent per month also applies, capped at 25 percent, coordinated with the failure-to-file penalty so you are not charged twice in the same month.¹⁴ Even a zeroed-out GRAT with no tax owed should file on time to start the limitations period.

If You Die Before the Term Ends

This is the central risk of any GRAT and worth understanding before you commit. If you die before the annuity term expires, all or a portion of the trust assets get pulled back into your gross estate under IRC Section 2036, which covers transfers where the decedent retained the right to income or enjoyment of the property.¹⁵ The IRS finalized regulations in 2008 confirming how Sections 2036 and 2039 interact for GRATs.¹⁶

The practical result: you paid the legal fees, and the assets end up in your estate as if the trust never existed. That is why shorter terms are popular despite offering less time for growth to exceed the hurdle. A two-year GRAT you can survive is far more useful than a ten-year GRAT you might not.

Keep the Records

Keep copies of everything: the signed and notarized trust instrument, asset transfer confirmations, the filed Form 709 with all attachments, every appraisal, and your certified mail receipt. These records protect you if the IRS questions the GRAT years later, and your beneficiaries and executor will need them to reconstruct what happened when the trust eventually terminates.

1
Office of the Law Revision Counsel. 26 U.S. Code 2702 – Special Valuation Rules in Case of Transfers of Interests in Trusts
2
eCFR. 26 CFR 25.2702-3 – Qualified Interests
3
Internal Revenue Service. Private Letter Ruling 200848017
4
Internal Revenue Service. Section 7520 Interest Rates
5
Office of the Law Revision Counsel. 26 USC 7520 – Valuation Tables
6
Internal Revenue Service. Rev. Rul. 2026-7
7
Internal Revenue Service. Get an Employer Identification Number
8
Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
9
Internal Revenue Service. Instructions for Form 709
10
Internal Revenue Service. Adequate Disclosure of Gifts
11
eCFR. 26 CFR 25.6081-1 – Automatic Extension of Time for Filing Gift Tax Returns
12
Internal Revenue Service. Where to File – Forms Beginning With the Number 7
13
Internal Revenue Service. Failure to File Penalty
14
Internal Revenue Service. Failure to Pay Penalty
15
Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate
16
Federal Register. Grantor Retained Interest Trusts – Application of Sections 2036 and 2039