Irrevocable Trust Strategies for High-Net-Worth Families

GRATs, SLATs, and IDGTs are three distinct irrevocable trust structures used by $5M–$50M households to shift wealth to heirs with minimal or zero gift tax cost. Each solves a different problem. With the OBBBA's permanent $15M federal exemption, the urgency to "use or lose" your exemption has faded — but these tools still do real work for state estate tax mitigation, income tax efficiency, and leveraged wealth transfer when assets outpace the §7520 hurdle rate.

The post-OBBBA landscape

The One Big Beautiful Bill Act (OBBBA), signed July 2025, permanently raised the federal estate, gift, and GST exemption to $15 million per person ($30M for married couples with portability).¹ For most households in the $5M–$50M range, this eliminates federal estate tax exposure entirely. The "sunset-driven SLAT rush" of 2024 is over — but irrevocable trusts remain valuable for three durable reasons:

1. State estate tax mitigation. Seventeen states tax estates well below the $15M federal threshold — Oregon at $1M, Massachusetts at $2M, New York at $7.35M (with a cliff). Irrevocable trust transfers reduce your state-taxable estate just as they do federally.
2. Leveraged gift tax-free wealth transfer. A GRAT can shift all appreciation above the §7520 hurdle rate to heirs with zero gift tax — regardless of how much that appreciation amounts to. The math works for any asset growing faster than the current 5.0% hurdle.
3. Income tax efficiency. An Intentionally Defective Grantor Trust (IDGT) lets you pay income tax on trust earnings without triggering a taxable gift — effectively transferring additional after-tax wealth to heirs each year at no gift tax cost.

Grantor Retained Annuity Trust (GRAT)

How a GRAT works

You transfer an asset to an irrevocable trust. The trust pays you a fixed annuity for a set term — typically 2–10 years — calculated so the present value of the annuity stream equals the asset's current value at the IRS §7520 hurdle rate. This makes the initial gift worth approximately zero, so no gift tax is owed and no lifetime exemption is consumed.²

If trust assets grow faster than the §7520 rate, the excess appreciation passes to remainder beneficiaries (typically your children or a trust for their benefit) at the end of the term — gift-tax-free, regardless of the dollar amount.

Zero-out GRAT structure

The standard approach is a "zero-out" GRAT: the annuity is set so its present value exactly equals the value transferred, making the taxable gift as close to zero as possible. If the grantor survives the trust term, all appreciation above the §7520 hurdle passes to heirs gift-tax-free. The IRS has explicitly upheld this structure (Rev. Rul. 2004-64).

Interactive GRAT remainder calculator

Set the asset value, expected growth rate, §7520 rate, and term. The calculator shows the annuity the trust pays back to you each year and the estimated remainder that passes to heirs gift-tax-free.

Key GRAT considerations

• Mortality risk. If the grantor dies during the trust term, assets revert to the estate — the strategy fails, but no penalty applies. This is why rolling GRATs (a new 2-year GRAT each year) are popular: short terms limit mortality risk at any given point while locking in gains from each completed term.
• Best asset types. High-growth or volatile assets benefit most: founder stock before a liquidity event, concentrated positions ahead of an expected appreciation run, PE fund interests, closely-held business interests. GRATs generate little value on stable, low-return assets like bonds or cash.
• Valuation discounts compound the advantage. Closely-held business interests contributed to a GRAT at a minority-interest or lack-of-marketability discount (typically 20–35%) lower the starting value — reducing the annuity threshold while letting full appreciation flow to the remainder. The discount and the above-hurdle growth both transfer tax-free.
• No basis step-up. Trust assets typically do not receive a stepped-up cost basis at the grantor's death. This matters if heirs plan immediate sales of appreciated positions; it is less significant for long-held, low-turnover assets.

Spousal Lifetime Access Trust (SLAT)

How a SLAT works

You gift assets to an irrevocable trust naming your spouse as a discretionary lifetime beneficiary. You use a portion of your lifetime gift tax exemption to fund the transfer — assets and all future appreciation leave your estate permanently — while your spouse retains access to trust income and principal at the trustee's discretion during their lifetime. After your spouse's death, assets pass to children or other named beneficiaries per the trust terms.

Post-OBBBA, the primary SLAT use cases are: (1) state estate tax reduction for households in low-exemption states like Oregon and Massachusetts, (2) asset protection from future creditors in states with strong spendthrift trust laws, and (3) estate freeze for growing business interests where enterprise value could approach the federal exemption over the next 10–20 years.

SLAT risks to manage

• Reciprocal trust doctrine. If you and your spouse each create SLATs for the other at the same time, the IRS may treat both trusts as if they were never created — pulling assets back into both estates. Stagger funding by 6–12 months and differentiate trust terms (different trustees, beneficiary distribution standards, asset types) to reduce reciprocal-trust risk.
• Divorce risk. After a divorce, your ex-spouse retains beneficiary status while assets sit outside your estate and outside your reach. A trust protector provision — granting a named third party the power to remove and replace the beneficiary spouse — can mitigate this. Coordinate with your estate attorney on state-specific rules.
• Death of spouse. If your spouse dies, you lose indirect access to trust assets. Households funding a SLAT with assets they may genuinely need in retirement should model the cash-flow consequences of early spouse death — and size the SLAT accordingly.

Intentionally Defective Grantor Trust (IDGT)

How an IDGT works

An IDGT is structured to be "complete" for estate tax purposes — assets are outside your estate — but "defective" for income tax purposes — you remain responsible for the trust's income tax obligations under IRC § 675.⁴ The IRS treats the trust as yours for income tax but not for estate tax, creating a powerful disconnect.

Every dollar of income tax you pay on trust earnings is effectively an invisible additional gift to trust beneficiaries — with no gift tax owed, no reduction in the trust's asset base, and no gift tax return required (Rev. Rul. 2004-64). Over years of compounding, this grantor tax payment mechanism can transfer substantial wealth at zero gift tax cost.

Sale to IDGT: the installment note strategy

The most powerful IDGT technique is the installment sale: you sell an appreciating asset to the trust in exchange for a promissory note bearing interest at the current mid-term AFR. Because the IDGT is treated as "you" for income tax purposes, no capital gains tax is triggered at the time of sale. Only the 10% seed gift is a taxable transfer.

May 2026 mid-term AFR (annual): 4.08%. At this rate, the trust needs to generate only 4.08% annual return to service the note — all appreciation above 4.08% compounds inside the trust for beneficiaries, free of additional gift or estate tax.³ This is meaningfully lower than the 5.0% §7520 GRAT hurdle.

Excess growth is first-year approximation (V × rate differential); actual compound amounts depend on growth realization, note structure, and trustee distributions. Hurdle rates per IRS Rev. Rul. 2026-09. Not a projection of actual results — consult an estate attorney.

IDGT mechanics to know

• Seed gift required. The trust needs initial equity — typically 10% of the note value — to demonstrate ability to service the installment payments. A $5M installment sale typically requires a $500K seed gift funded from your lifetime exemption. The installment note is not a gift; only the seed gift uses exemption.
• Power to substitute assets (§ 675(4)). The typical "defect" triggering grantor trust status is a power to reacquire trust assets by substituting assets of equivalent value. This keeps the trust in grantor-trust status for income tax without giving you actual control over distributions.
• Legislative risk. Several tax proposals have targeted grantor trust treatment. No legislation eliminating IDGTs has passed as of 2026, but this remains a policy risk for long-term structures. An estate attorney should build flexibility into the trust document where possible.

Dynasty trust

A dynasty trust holds assets across multiple generations without triggering estate or GST tax at each generational transfer. With the OBBBA's permanent $15M GST exemption per person ($30M married), you can fund a dynasty trust and shelter all future appreciation from GST tax permanently — for as long as the trust operates.¹

States permitting perpetual trusts (no rule against perpetuities): South Dakota, Nevada, Delaware, Alaska, and Wyoming are the most commonly used. Trusts settled in South Dakota or Nevada can grow across generations without state income tax in most circumstances, and without estate tax at each generational death.

Best-fit assets: illiquid, long-duration interests (PE funds, venture capital, closely-held business stakes) where family wealth is expected to compound over 20–50+ years. Short-duration assets or those heirs need liquidity from within 10–15 years are poor dynasty trust candidates given the irrevocability.

Strategy comparison

Integration with your overall plan

No irrevocable trust runs in isolation. A well-integrated HNW plan connects these structures to the rest of the tax and investment picture:

• GRAT + direct indexing. If the GRAT holds a concentrated stock position, pair it with a direct-indexed SMA in taxable accounts to harvest losses that offset any gains recognized during the GRAT term. See the direct indexing guide for the mechanics.
• IDGT + Roth conversion window. The grantor paying income tax on IDGT earnings can spike AGI in conversion years — potentially pushing you into higher IRMAA tiers. Model the IDGT income obligation alongside Roth conversion pacing. See the Roth conversion strategy guide for bracket and IRMAA interaction.
• SLAT + annual exclusion gifting. Continue $19,000/recipient annual exclusion gifts to trust beneficiaries in addition to the SLAT — each gift reduces the estate further without touching lifetime exemption.⁵
• Dynasty Trust + QSBS. Founder stock eligible for the § 1202 QSBS exclusion (OBBBA raised the cap to $15M) held in a dynasty trust requires careful grantor trust structuring to preserve the exclusion — QSBS is only available to non-corporate taxpayers who held stock directly. See the QSBS guide for the eligibility framework.

These strategies require an estate attorney to draft, a CPA to model income tax consequences year by year, and a fee-only wealth advisor to coordinate cash flows with the investment portfolio. The failure mode at $5M–$50M is rarely a bad trust document — it's trusts that aren't integrated with each other or with the broader tax plan.

Related guides: Estate Planning for $5M–$50M — federal and state estate tax overview, ILIT structures, beneficiary coordination. Multi-Generational Wealth Planning — annual gifting, 529 superfunding, GRATs in context of family governance.