If you own appreciating stock, a family business, or any asset you expect to jump in value, there’s a trust structure the ultra-wealthy have quietly used for decades to hand billions to their kids while paying almost nothing in gift tax. It’s called a Grantor Retained Annuity Trust, or GRAT, and Nike founder Phil Knight has reportedly used a chain of them to move billions of dollars in Nike (NYSE:NKE | NKE Price Prediction) shares to his heirs with a gift-tax bill that rounds to zero. The kicker: GRATs are legal in every state, and you don’t need a billion dollars to open one.
The Buried Rule Inside the Tax Code
You drop appreciating assets into a short-term irrevocable trust, usually two to three years. The trust pays you back the original value plus a modest IRS-set interest rate (the Section 7520 rate) in annuity payments. Anything the assets earn above that rate passes to your heirs. Free. No gift tax. No estate tax. If the assets underperform, you get everything back and you’re out only legal fees. That’s why practitioners call it a “heads I win, tails I tie” trust.
Knight’s timing has been a case study. He seeded GRATs when Nike shares were depressed, then let the growth pour out to his family. Even with Nike stock down 32.9% year to date and trading around $42.11, the shares he transferred years ago at far lower splits have already compounded outside his taxable estate.
The Statute That Makes It Work
GRATs live inside 26 U.S. Code §2702, part of Chapter 14 of the Internal Revenue Code. The IRS blessed the “zeroed-out” version in Walton v. Commissioner (2000), which is why a properly structured GRAT can be designed so the taxable gift is calculated at essentially $0. Congress has tried repeatedly to kill or curb GRATs (minimum 10-year terms have been proposed multiple times) and every attempt has failed. As of 2026, the rules are unchanged.
Who Can Actually Use One
Anyone. There’s no income limit, no residency test, no age cap. You do need three things: an asset you believe will outrun the current 7520 rate, enough net worth that the legal setup (usually $5,000 to $15,000) is worth it, and heirs you actually want to enrich. GRATs are especially powerful for concentrated stock positions, pre-IPO shares, private company equity, and real estate. They are useless for cash sitting in a savings account, because a checking account will never beat the hurdle rate.
Who’s excluded in practice: anyone whose estate is already comfortably under the 2026 estate tax basic exclusion amount of $15,000,000 per person. If you’re under that ceiling, you don’t need a GRAT. Your $19,000 annual gift exclusion and the lifetime exemption already cover you.
How to Set One Up
- Hire an estate attorney. This is not a DIY product.
- Choose the asset. Concentrated single-stock positions with high upside work best.
- Pick a term. Two to three years is standard. Shorter terms reduce mortality risk (more on that below).
- Fund the trust and set the annuity so the taxable gift zeroes out against the current 7520 rate.
- Receive the annuity payments back. Whatever’s left in the trust after the final payment goes to your heirs (or to a continuation trust) transfer-tax-free.
- Rinse and repeat. Sophisticated families run “rolling GRATs,” feeding the annuity payments right back into new GRATs every year.
The Trap Nobody Talks About
You have to outlive the term. If you die before the annuity payments finish, the entire remaining trust snaps back into your taxable estate as if the GRAT never existed. That’s the mortality risk, and it’s why shorter terms are safer. There’s a second trap: GRATs work only if the assets beat the Section 7520 rate. In a low-return environment with a high hurdle, you get nothing but paperwork. And a third: because the grantor pays the income tax on trust earnings during the term (that’s the “grantor” part), you need enough outside liquidity to cover that bill without complaining. Ignore any of the three and the strategy collapses. Respect them and you’ve just found the same door Phil Knight walked through.
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