Two of the most powerful lifetime transfer tax planning tools are the grantor retained annuity trust (GRAT) and the charitable remainder trust (CRT). A GRAT transfers appreciation above the IRS hurdle rate to beneficiaries with zero gift tax. A CRT converts appreciated assets into an income stream for the donor while generating a current charitable deduction and avoiding immediate capital gains recognition on the contributed asset. Both tools require understanding the §7520 rate - the IRS's assumed rate of return that determines how much value is "given away" and how much is retained.
What it is: The §7520 rate is 120% of the applicable federal mid-term rate for the month of the transfer. It is the IRS's assumed rate of return on assets - the hurdle rate that a GRAT must beat for assets to pass to beneficiaries gift-tax-free, and the discount rate used to calculate the charitable deduction in a CRT.
Current direction: The §7520 rate fluctuates monthly with interest rates. Higher §7520 rates favor CRTs (larger charitable deductions) and hurt GRATs (harder hurdle to beat). Lower §7520 rates favor GRATs (easier to beat) and reduce CRT charitable deductions.
2026 context: Verify the current §7520 rate with the IRS monthly announcement before structuring any split-interest trust. The rate is published monthly at irs.gov and affects all calculations.
A grantor retained annuity trust is an irrevocable trust to which the grantor transfers assets, retaining the right to receive a fixed annuity payment for a specified term. At the end of the term, any remaining assets pass to the beneficiaries (typically children) free of gift tax. The gift element at creation equals the fair market value of the transferred assets minus the present value of the retained annuity stream - discounted using the §7520 rate. In a "zeroed-out" GRAT, the annuity is set so that the present value of the retained annuity precisely equals the value transferred, producing a taxable gift of zero.
The strategy: assets grow inside the GRAT at a rate higher than the §7520 hurdle. That excess growth passes to the beneficiaries tax-free. A $5 million portfolio transferred to a GRAT at a §7520 rate of 4.4% needs to generate returns above 4.4% for anything to remain at the end of the term. If the portfolio grows at 10% annually for a two-year GRAT, approximately $750,000 of excess appreciation passes to the beneficiaries with zero gift tax used.
If the grantor dies during the GRAT term, the assets are pulled back into the grantor's estate under IRC §2036 - the GRAT fails completely for transfer tax purposes. This is the primary planning risk of GRATs. The shorter the term, the lower the mortality risk but the harder the hurdle to beat. Zeroed-out two-year GRATs on rapidly appreciating assets (pre-IPO stock, venture investments) are the most common strategy - the two-year term minimizes mortality risk and the high growth rate easily beats the §7520 hurdle.
A charitable remainder trust is an irrevocable trust that pays income to one or more non-charitable beneficiaries (typically the donor and/or spouse) for life or a term of years, with the remainder passing to charity at the end. The donor receives a §170 charitable deduction for the present value of the charitable remainder interest - calculated using the §7520 rate. The CRT pays no income tax, so appreciated assets contributed to the CRT can be sold inside the trust without immediate capital gain recognition; the gains are recognized as they are distributed to the income beneficiaries over time.
CRAT (Charitable Remainder Annuity Trust): Pays a fixed dollar amount annually. The annuity amount is set at creation and does not change with trust performance. Suitable for donors who want predictable income.
CRUT (Charitable Remainder Unitrust): Pays a fixed percentage of the trust's annual fair market value. Income fluctuates with trust performance - rising markets mean higher distributions. The most common CRT structure for younger donors with long time horizons.