What happens if a business owner dies during a GRAT term?

A GRAT holds a business interest for a fixed term

A GRAT is an irrevocable trust that receives a business interest from its owner. In exchange, the owner receives an annuity for a term. Practitioners note that the gift tax transfer occurs when the interest is transferred to the GRAT, so the gift event is tied to funding.

Annuity payments run for the length of the term. Practitioners describe the business interest as the source of income for covering those payments.

Death before the term ends brings assets into the estate

Death during the annuity term changes how the trust assets are treated.

Practitioners also explain why the length of the term matters. The estate inclusion risk applies when the owner dies before the annuity term ends. An owner who dies midway leaves a trust whose assets are pulled back into the estate in the way described above.

The gift is valued when the interest goes into the trust

The remainder gift is valued at funding. The retained annuity therefore enters the valuation of the gift itself.

Official guidance on the gift tax return adds a related point. The Form 709 instructions state that sections 2701 and 2702 set special valuation rules for gifts of equity interests in a corporation or partnership, or gifts in trust.

Owner-specific points for business interests

A business owner who gifts the company may still need control of it or its income to fund retirement. A GRAT provides an annuity to the owner during the term.

Two timing facts shape the owner's position. The gift tax transfer occurs at funding, while the estate inclusion question depends on whether the owner is alive when the annuity term ends.