Estate planning · comparison
GRAT vs. Installment Sale to a Grantor Trust
Updated 2026-10-21 · Gregory Garone, CEPA®
Short answer: Both shift future growth on an asset to family while you pay the trust’s income tax. A GRAT is spelled out in the tax code and needs little or no gift, but it fails if you die during the term and is poorly suited to generation-skipping planning. A sale to a grantor trust uses a lower interest rate and works well for multigenerational trusts, but needs a seed gift and has less statutory certainty.
GRAT vs. Sale to an IDGT, side by side
| Question | GRAT | Sale to an IDGT |
|---|---|---|
| Legal basis | Section 2702 of the tax code and IRS regulations | Case law and practice; no specific statute |
| Hurdle rate | The Section 7520 rate | The applicable federal rate, which is usually lower |
| Gift needed | Can be set near zero | Usually a seed gift to the trust before the sale |
| If you die during the term | Most or all assets return to your estate | Only the unpaid note is in your estate; the growth stays out |
| Generation-skipping planning | GST exemption cannot be allocated efficiently until the term ends | GST exemption can be allocated to the seed gift at the start |
| Valuation risk | Formula annuity adjusts automatically if values are revalued | A revaluation can create a taxable gift unless the sale is structured for it |
When each one tends to fit
GRAT may fit when
- You want a low-risk, well-established way to shift growth on a volatile asset.
- You are comfortable rolling short-term GRATs over several years.
- You do not need the transfer to benefit grandchildren directly.
Sale to an IDGT may fit when
- You are funding a long-term dynasty trust and want to use GST exemption.
- The asset is expected to grow faster than the applicable federal rate but perhaps not the 7520 rate.
- You have exemption available for a seed gift.
An example
Illustration only: an owner expects a company interest worth $10 million to grow 8% a year. A two-year GRAT would pass growth above the Section 7520 rate to children. A sale of the same interest to a grantor trust for a nine-year note at the lower applicable federal rate, after a $1 million seed gift, would pass growth above that lower rate and could be built into a GST-exempt trust from the start.
Questions to bring to your CPA or advisor
- What hurdle rate applies this month under each approach?
- How long can the term safely be given my age and health?
- Do I want the trust to benefit grandchildren and later generations?
- How will the asset be appraised, and how do we handle a valuation challenge?
Common questions
What is an intentionally defective grantor trust?
An irrevocable trust that is outside your estate for estate tax purposes but treated as yours for income tax. You pay its income tax, which lets its assets grow faster for beneficiaries.
Why do GRATs often use two-year terms?
Short terms reduce the chance of dying during the term and let gains on one GRAT be locked in before rolling the annuity into a new GRAT.
Does the sale to a grantor trust trigger capital gains tax?
Generally no, because a sale between you and your own grantor trust is ignored for income tax purposes. The trust keeps your cost basis.
Which approach does the IRS view more favorably?
The GRAT, because its rules are written into the tax code. Sales to grantor trusts are widely used, but the structure relies on case law and careful drafting.
Sources and limitations
More comparisons
- Convert to Roth vs. Keep it traditional
- Charitable remainder trust vs. Donor-advised fund
- Charitable lead trust vs. Charitable remainder trust
- Earnout vs. Seller note
- Use NUA vs. Roll it all to an IRA
- Claim at 62 vs. Wait until 70
- Roth 401(k) vs. Traditional 401(k)
- Take the lump sum vs. Take the annuity
- Donor-advised fund vs. Private foundation
- Sell to an ESOP vs. Sell to a third party
- All comparisons
Weighing this choice for real?
Tell us what you are deciding and when. Greg will reply personally.
Submitting a question does not begin an advisory relationship.