A grantor retained unitrust works by letting you move assets into an irrevocable trust, take annual payments equal to a fixed percentage of the trust’s value for a chosen number of years, and then hand whatever is left to your beneficiaries as a discounted taxable gift. Only the remainder interest counts as the gift, and the IRS discounts its value using your retained payment stream and the Section 7520 interest rate in effect when you fund the trust. Anything the assets earn above the rate the IRS assumed passes to your beneficiaries free of gift and estate tax.
The Three Moving Parts
Every GRUT has three: you as the grantor, the unitrust interest you keep, and the remainder interest your beneficiaries eventually receive.
When you fund the trust, you give up ownership of the assets. In return, you keep the right to receive a payment each year equal to a fixed percentage of the trust’s total value, recalculated annually. At a 5% unitrust rate, a trust worth $2 million pays you $100,000 this year. If it grows to $2.4 million, you receive $120,000 next year. If it drops to $1.8 million, you receive $90,000. Payments rising and falling with the portfolio is the defining feature of a unitrust.
The remainder interest is whatever sits in the trust when your payment term ends. Those assets go to the beneficiaries you named at the start. You cannot change the beneficiaries or the terms later. Irrevocable means irrevocable.
How the Taxable Gift Shrinks
The structure exists to reduce the taxable gift. You are not taxed on the full value of what you contribute. The IRS treats the gift as only the present value of the remainder, calculated by subtracting the present value of your retained unitrust payments from the fair market value of what you put in.
Three variables drive that calculation:
- The Section 7520 rate. The IRS publishes this monthly at 120% of the federal midterm rate, rounded to the nearest two-tenths of a percent. In early 2026 it has hovered between 4.6% and 4.8%. A higher 7520 rate assumes faster growth, which makes your percentage-based payments worth more on paper, which shrinks the remainder and lowers the taxable gift.1Internal Revenue Service. Section 7520 Interest Rates
- The unitrust percentage. A higher payout means you are keeping more value, leaving a smaller remainder gift.
- The trust term. More years of payments increases the present value of your retained interest and reduces the taxable gift.
You can choose the 7520 rate from the funding month or either of the two preceding months, which gives you a small window to lock in a favorable one.
Why You Cannot Zero Out a GRUT
Estate planners routinely tune a grantor retained annuity trust (GRAT) so that the retained annuity equals the full value of what was contributed, pushing the taxable gift to essentially zero. A GRUT cannot do this. Because your payments are a percentage of a fluctuating trust value rather than a fixed dollar amount, the IRS valuation formula always produces a remainder greater than zero, no matter how high you set the unitrust percentage or how long the term runs. That built-in floor on the taxable gift is one reason GRATs dominate modern estate-freeze planning while GRUTs occupy a narrower niche.
Making the Retained Interest Qualify
Your retained unitrust interest has to qualify under Section 2702 of the Internal Revenue Code. If it does not, the IRS values that interest at zero, meaning the full value of the contributed assets becomes a taxable gift. That outcome destroys the entire benefit.2Office of the Law Revision Counsel. 26 US Code 2702 – Special Valuation Rules in Case of Transfers of Interests in Trusts
To qualify, the trust must give you an irrevocable right to receive a fixed percentage of the trust’s net fair market value, recalculated annually, paid at least once per year. The trustee cannot satisfy your payment by issuing a note, debt instrument, or similar arrangement. It has to be an actual distribution. If the trust also allows income above the unitrust amount to be paid to you, that excess is not part of the qualified interest and will not reduce the taxable gift.3eCFR. 26 CFR 25.2702-3 – Qualified Interests
Choosing the Term
The term can technically be a fixed number of years or your lifetime, but a lifetime term defeats the purpose. If you retain income rights for life, Section 2036 pulls the entire trust value back into your taxable estate at death, which is exactly the outcome the trust was designed to avoid.4Office of the Law Revision Counsel. 26 US Code 2036 – Transfers With Retained Life Estate Virtually every GRUT uses a fixed term of years.
Picking the right number is a balancing act. A longer term reduces the taxable gift, but it raises the odds that you die before the term ends. If that happens, Section 2036 applies and the trust assets come back into your gross estate as though the transfer never occurred. The gift tax exemption you used on the original transfer is credited back, so you are not double-taxed, but the entire exercise produces no net savings. Estate planners model several term lengths against actuarial life expectancy data to find the point where tax savings and mortality risk balance.
Picking Assets That Beat the 7520 Rate
A GRUT works best when the trust’s assets grow faster than the Section 7520 rate assumed they would. That spread, actual growth minus assumed growth, is what passes to your beneficiaries tax-free. Growth stocks, startup equity, and interests in a closely held business are natural candidates.
When you fund a GRUT with interests in a private business or other illiquid assets, the initial fair market value may reflect valuation discounts for lack of marketability or lack of control. A lower starting value means a smaller taxable gift. The IRS scrutinizes those discounts closely, and professional appraisers typically support them with empirical data from restricted stock studies and pre-IPO transactions. Courts have pushed back on discounts they consider excessive, so the appraisal has to withstand challenge.
Filing the Gift Tax Return
Funding a GRUT is a completed gift of the remainder interest. You must file IRS Form 709, the gift tax return, by April 15 of the year after the transfer. Transfers to a trust are considered future interests and are not eligible for the annual gift tax exclusion, so you report the gift regardless of size.5Internal Revenue Service. Instructions for Form 709 The taxable gift amount is applied against your lifetime exemption. Anything above your remaining exemption owes gift tax at up to 40%.
Running the Trust Year to Year
A GRUT is not set-and-forget. The trustee has recurring obligations that affect both compliance and the trust’s validity.
Annual Valuation and Payment
The trust assets must be valued at fair market value at least once a year, typically on the anniversary of creation or at the start of the trust’s tax year. That valuation determines the dollar amount of the unitrust payment: fair market value multiplied by the fixed unitrust percentage, distributed to the grantor.3eCFR. 26 CFR 25.2702-3 – Qualified Interests Payments can be made annually, quarterly, or monthly, but at least once a year.
For publicly traded securities, the annual valuation is straightforward. For real estate, private business interests, or other hard-to-price assets, a professional appraiser is usually needed each year. Those fees can run from a few thousand dollars to $10,000 or more depending on complexity, and they continue for the life of the trust.
Tax Returns
A GRUT is a grantor trust, which means you, not the trust, pay income tax on whatever it earns. The trust still has its own filings. The trustee files IRS Form 1041 to report the trust’s income and indicate that it is reportable on the grantor’s personal return.6Internal Revenue Service. About Form 1041, US Income Tax Return for Estates and Trusts Form 5227, the split-interest trust information return, may also apply.7Internal Revenue Service. Split-Interest Trust Annual Return Form 5227
Paying income tax on earnings you do not fully receive is a feature, not a bug. Each dollar of income tax you pay is effectively a tax-free gift to the remainder beneficiaries, because it reduces your taxable estate without counting as another transfer.
Skipping a Generation
If you name grandchildren or more remote descendants as remainder beneficiaries, the generation-skipping transfer (GST) tax comes into play. GST tax is a separate layer on top of gift or estate tax, imposed at a flat 40% on transfers that skip a generation.8eCFR. 26 CFR 26.2641-1 – Applicable Rate of Tax
You can shield GRUT transfers by allocating your GST exemption to the trust. The exemption equals the basic exclusion amount, and once allocated it is irrevocable, so be deliberate about which transfers receive it.9Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption
One wrinkle: when a GRUT remainder passes from a non-skip beneficiary such as your child to skip beneficiaries such as grandchildren, the transition can trigger what the code calls a taxable termination, imposing GST tax on the full value of the trust assets at that point. Careful drafting can mitigate this, but the interplay between GRUT structures and GST allocation is one of the more technical corners of the planning and an expensive place to get things wrong.
When a GRUT Fits Better Than a GRAT
GRUTs and GRATs are close cousins, but the payment mechanic pulls them in different directions.
- Interest rate environment. GRATs work best when the 7520 rate is low, because a fixed annuity looks more valuable against a low assumed growth rate. GRUTs work best when the rate is high, because the IRS assumes the percentage-based payments will be calculated on a larger, faster-growing balance. With the 7520 rate near 4.6% in early 2026, the environment is more favorable for GRUTs than during the low-rate years.1Internal Revenue Service. Section 7520 Interest Rates
- Zeroing out the gift. A GRAT can be tuned to produce essentially zero taxable gift. A GRUT always leaves a taxable remainder.
- Inflation protection. GRUT payments track asset values and rise with the portfolio. GRAT payments stay flat even if the trust doubles.
- Downside behavior. If the portfolio loses value, GRAT payments stay fixed and can drain the trust. GRUT payments shrink with the trust and preserve a proportionate remainder.
In practice GRATs are far more common, because the ability to zero out the gift is a strong advantage for short-term rolling strategies. GRUTs tend to show up when the grantor wants payments that keep pace with asset growth, or when the interest rate environment makes the unitrust math more compelling.