Skip to main content

Nixon Peabody LLP

  • People
  • Capabilities
  • Insights
  • About
Trending Topics
    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni
    Practices

    View All

    • Affordable Housing
    • Community Development Finance
    • Corporate & Finance
    • Cybersecurity & Privacy
    • Entertainment & Media
    • Environmental
    • Franchising & Distribution
    • Government Investigations & White Collar Defense
    • Healthcare
    • Intellectual Property
    • International Services
    • Labor, Employment, and Benefits
    • Litigation
    • Private Wealth & Advisory
    • Project Finance
    • Public Finance
    • Real Estate
    • Regulatory & Government Relations
    Industries

    View All

    • Aviation
    • Cannabis
    • Consumer
    • Energy
    • Financial Services
    • Healthcare
    • Higher Education
    • Infrastructure
    • Manufacturing
    • Nonprofit Organizations
    • Real Estate
    • Sports & Stadiums
    • Technology
    Value-Added Services

    View All

    • Alternative Fee Arrangements

      Developing innovative pricing structures and alternative fee agreement models that deliver additional value for our clients.

    • Continuing Education

      Advancing professional knowledge and offering credits for attorneys, staff and other professionals.

    • Crisis Advisory

      Helping clients respond correctly when a crisis occurs.

    • DEI Strategic Services

      Providing our clients with legal, strategic, and practical advice to make transformational changes in their organizations.

    • eDiscovery

      Leveraging law and technology to deliver sound solutions.

    • Environmental, Social, and Governance (ESG)

      We help clients create positive return on investments in people, products, and the planet.

    • Global Services

      Delivering seamless service through partnerships across the globe.

    • Innovation

      Leveraging leading-edge technology to guide change and create seamless, collaborative experiences for clients and attorneys.

    • IPED

      Industry-leading conferences focused on affordable housing, tax credits, and more.

    • Legal Project Management

      Providing actionable information to support strategic decision-making.

    • Legally Green

      Teaming with clients to advance sustainable projects, mitigate the effects of climate change, and protect our planet.

    • Nixon Peabody Trust Company

      Offering a range of investment management and fiduciary services.

    • NP Capital Connector

      Bringing together companies and investors for tomorrow’s new deals.

    • NP Second Opinion

      Offering fresh insights on cases that are delayed, over budget, or off-target from the desired resolution.

    • NP Trial

      Courtroom-ready lawyers who can resolve disputes early on clients’ terms or prevail at trial before a judge or jury.

    • Social Impact

      Creating positive impact in our communities through increasing equity, access, and opportunity.

    • Women in Dealmaking

      We provide strategic counsel on complex corporate transactions and unite dynamic women in the dealmaking arena.

    1. Home
    2. Insights
    3. Articles
    4. Consider GRATs to increase wealth during economic downturns

      Articles

    Article

    Consider GRATs to increase wealth during economic downturns

    April 11, 2025

    LinkedInX (Twitter)EmailCopy URL

    By Joshua Caswell

    Discover how Grantor Retained Annuity Trusts can help you transfer wealth efficiently, reduce estate taxes, and leverage market rebounds for significant long-term planning benefits.

    In times of economic uncertainty, many investors instinctively tighten their grip on their wealth, waiting for stability to return. However, a declining market presents successful individuals and families who are willing to transfer assets the opportunity to implement wealth transfer strategies that can generate significant tax savings. Depressed asset values create increased leverage, allowing those with long-term planning in mind to transfer wealth more efficiently, reduce estate tax exposure, and position themselves for significant long-term advantage. One compelling strategy to consider is a “Grantor Retained Annuity Trust,” or GRAT. 

    What is a Grantor Retained Annuity Trust (GRAT)?

    A GRAT is a type of trust that is used to transfer appreciation out of one’s taxable estate without having to utilize any gift tax exemption. This planning technique is particularly appealing for those who are not looking to deplete their nest egg but who are comfortable transferring away future appreciation on their assets. 

    How do GRATs work?

    Funding a GRAT involves transferring property to the trust, while retaining an annuity interest in the contributed property over a defined period of years. The annuity amount is calculated such that the entire initial contribution is returned to the grantor (creator of the trust) by way of the annuity payments. This calculation also assumes that the initial contribution will grow at a specific rate of return set forth by the Internal Revenue Service (the “IRS hurdle rate”), and this appreciation is baked into the annuity amount. Therefore, if the GRAT’s investments outperform the IRS hurdle rate (currently 5%), all the excess appreciation will pass to the grantor’s intended beneficiaries—for example, his or her children and other descendants. 

    Why are GRATs effective?

    Since the success of a GRAT is predicated on beating the IRS hurdle rate, a market recovery following an economic downturn can produce exactly the kind of returns that make a GRAT effective. Stated differently, if the value of the assets in the GRAT rebounds, most of the appreciation as a result of the rebound will pass through to the intended beneficiaries with minimal transfer tax consequences.

    GRATs in action

    Investor creates a two-year GRAT and funds it with $1,000,000 of equities in April 2025 with a 5% IRS hurdle rate. At the end of years 1 and 2, Investor receives annuity payments equal to the present value of her initial contribution—in this example, Investor receives approximately $490,000 back at the end of year one and another $590,000 at end of year two. Suppose the market recovers from its current dip, equities perform well, and the assets earn 15% annually over the two-year period. At the end of the trust term, all investment growth above 5% is distributed to the beneficiaries free of estate and gift tax. At this point, the GRAT ends and Investor can continue to enjoy using the original principal. No further action is required.

    What is the risk of an unsuccessful GRAT?

    If the assets transferred into the GRAT do not beat the IRS hurdle rate, the GRAT will be unsuccessful from a gifting standpoint. As a result, all the assets transferred to the trust will be returned to the grantor. Aside from the costs for setting up the GRAT, it’s as if the GRAT never happened—meaning there is a fairly low “cost” associated with an unsuccessful GRAT.

    For further questions and to explore how you can take advantage of the current market conditions using GRATs and other wealth transfer techniques, contact your Nixon Peabody attorney.

    Practices

    Private Wealth & AdvisoryWealth Management

    Insights And Happenings

    • Article

      Private Equity Playbook: Investing in Sports' Future

      March 31, 2025
    • Alert

      Prepare now for BE-10 Benchmark Survey of US Direct Investment Abroad

      March 12, 2025
    • Article

      Gift and Estate Tax: Numbers, numbers, numbers 2025

      Dec 11, 2024
    The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

    Subscribe to stay informed of the latest legal news, alerts, and business trends.Subscribe

    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni
    • Cookie Preferences
    • Privacy Policy
    • Terms of Use
    • Accessibility Statement
    • Statement of Client Rights
    • Purchase Order Terms & Conditions
    • Nixon Peabody International LLC
    • PAL
    © 2025 Nixon Peabody. All rights reserved