Key takeaways:
- GRATs remain authorized under federal tax law and continue to provide legitimate estate planning benefits.
- What has changed is the need for meticulous execution, as the IRS has become increasingly concerned about how some GRATs are implemented.
- Advisors and investors who prioritize careful planning, documentation, valuation support, and ongoing compliance will be best positioned to realize the benefits of GRATs while navigating an environment of heightened scrutiny.
For years, high-net-worth entrepreneurs, business owners, and investors have used Grantor Retained to transfer appreciating assets to beneficiaries while minimizing gift and estate taxes. Recently, however, the Internal Revenue Service has increased its scrutiny of certain GRAT transactions, signaling a more challenging enforcement environment for taxpayers and advisors alike.
A GRAT is an irrevocable trust that allows an individual, known as the grantor, to transfer assets into a trust while retaining the right to receive fixed annual payments for a specified period. If the assets grow faster than the IRS’s assumed interest rate (known as the Section 7520 rate), the excess appreciation passes to beneficiaries with little or no additional gift tax. This makes GRATs particularly attractive for assets that are expected to appreciate significantly in the future, such as closely held businesses, concentrated stock positions, or pre-IPO shares.
It’s important to note that GRATs are not tax loopholes created by creative lawyering: Congress established special valuation rules for retained-interest trusts under Internal Revenue Code Section 2702, and Treasury regulations recognize GRATs as a qualified retained-interest structure. The latest enforcement efforts by the IRS focus on how GRATs are valued and administered, not on the legality of the vehicles themselves.
The zeroed-out GRAT
One common strategy for minimizing estate tax is known as the “zeroed-out” GRAT. In this structure, the annuity payments retained by the grantor are designed to offset almost the entire value of the transferred assets for gift-tax purposes. This allows substantial future appreciation to be shifted to heirs while using very little of the grantor’s lifetime gift and estate tax exemption.
But the IRS has become increasingly concerned about how some GRATs are implemented, and one major area of focus is valuation. Because the tax benefits of a GRAT depend heavily on the value assigned to assets contributed to the trust, the IRS frequently reviews transfers involving closely held businesses, partnership interests, and other hard-to-value assets.
Auditors have challenged taxpayers who allegedly failed to account for pending mergers, acquisitions, or other events that could significantly increase asset values shortly after the transfer. For example, several disputes have involved GRATs that are funded with company stock shortly before major corporate transactions that dramatically increased the value of the transferred assets.
GRATs facing litigation: The Elcan v. Commissioner case
One of the more closely watched examples of the increased scrutiny around GRATs is the pending case of Elcan v. Commissioner, which challenges not only asset valuations but also how GRATs are administered after they are established.
The case involves Trisha Elcan and Chuck Elcan, who created GRATs in 2018 using substantial business interests and securities. According to the IRS, the grantor later exercised substitution powers to exchange trust assets for promissory notes, and those notes were subsequently used in connection with required annuity payments.
The IRS argues that the use of grantor promissory notes and certain annuity-payment mechanics caused the retained annuity interests to fail the requirements for a “qualified interest” under Section 2702. In the alternative, the IRS contends that some of the note-substitution transactions themselves constituted taxable gifts.
The financial stakes are significant: The IRS has asserted roughly $613.9 million in gift-tax deficiencies and approximately $122.8 million in penalties, resulting in a total exposure exceeding $736 million. The taxpayers dispute the government’s position, and the case remains unresolved. If the retained annuity interests are ultimately found not to be qualified interests under Section 2702, much or all of the value transferred to the GRATs could be treated as taxable gifts.
Legislation: The Getting Rid of Abusive Trusts Act
Beyond litigation, lawmakers are also examining GRATs. In April 2026, Sentaors Ron Wyden and Angus King introduced the Getting Rid of Abusive Trusts Act, which would impose new restrictions on GRAT planning. Among other provisions, the proposal would require a minimum 15-year GRAT term and place additional limits on structures designed to reduce risk while maximizing tax benefits. Although the legislation has not been enacted, it reflects ongoing political interest in tightening GRAT rules.
Critics have also long questioned the use of rolling GRATs, in which a grantor repeatedly creates a series of short-term GRATs. Proponents view the technique as a legitimate way to manage investment and mortality risk, while critics argue that it allows taxpayers multiple opportunities to transfer appreciation with limited downside. As a result, rolling GRATs have frequently appeared in legislative proposals seeking to restrict GRAT planning.
Careful execution is key
As the IRS appears increasingly willing to challenge aggressive GRAT planning, meticulous execution is more critical than ever. That includes independent appraisals, thorough valuation support, detailed documentation, and careful compliance with trust administration requirements.
Advisors and investors must also remember that GRATs are not risk-free. If the grantor dies before the trust term ends, much of the intended tax benefit may be lost. Likewise, if the trust assets fail to outperform the Section 7520 rate, little or nothing may pass to beneficiaries.
Advisors and investors who prioritize careful planning, documentation, valuation support, and ongoing compliance will be best positioned to realize the benefits of GRATs while navigating an environment of heightened scrutiny.
The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.