The Trusts Wealthy Families Actually Use: GRATs, SLATs, IDGTs, and Dynasty Trusts

Four trust structures do most of the heavy lifting in wealth transfer planning. A GRAT (grantor retained annuity trust) passes the appreciation of an asset to heirs at little or no gift tax cost. A SLAT (spousal lifetime access trust) moves assets out of the estate while a spouse retains access as beneficiary. An IDGT (intentionally defective grantor trust) lets you sell appreciating assets to a trust and freeze their value in your estate. A dynasty trust holds wealth outside the transfer tax system for multiple generations. Each solves a different problem, and each carries real tradeoffs.

With the federal estate, gift, and GST exemption now permanent at $15 million per person under the One Big Beautiful Bill Act, the deadline pressure of 2025 has passed. What remains is the durable question: which structure, if any, fits your family's facts. Here is how each one works in plain English.

How does a GRAT work?

A GRAT is a wager that an asset will grow faster than an interest rate set by the IRS. You transfer an asset into a trust for a fixed term, often two to ten years. The trust pays you back an annuity each year, sized so that the payments plus interest at the IRS Section 7520 rate, published monthly, return essentially the full value you contributed. Because you are scheduled to get everything back, the taxable gift is at or near zero; planners call this a "zeroed-out" GRAT, a design blessed in principle by the Tax Court's Walton decision.

If the asset grows faster than the 7520 hurdle rate, the excess growth stays in the trust and passes to your heirs free of gift tax. If it grows slower, the trust simply pays everything back to you and you are roughly where you started, minus legal fees. That asymmetry is the appeal: meaningful upside, limited downside, and little or no lifetime exemption consumed.

Consider a hypothetical example. An executive funds a 2-year GRAT with $10 million of company stock when the 7520 rate is 5 percent. The trust pays her two annuity payments totaling roughly $10.8 million. If the stock returns 20 percent annually, about $1.6 million remains in the trust after the final payment and passes to her children with essentially no gift tax and almost no exemption used. If the stock is flat or falls, the annuity payments return everything to her and the strategy costs little beyond setup.

When a GRAT fits, and what can go wrong

GRATs suit assets with high expected appreciation or volatility: pre-IPO stock, a business unit ahead of a sale, concentrated public stock. Many families run "rolling" short-term GRATs, funding a new one with each annuity payment, so that any period of strong returns gets captured.

The risks are specific. If you die during the GRAT term, most or all of the trust value comes back into your estate, which is why terms are kept short. If the asset underperforms the hurdle rate, nothing transfers. GRATs are also poor vehicles for generation-skipping plans, because GST exemption generally cannot be allocated efficiently until the term ends, a problem known as the ETIP rule. And proposals to restrict short-term and zeroed-out GRATs surface in Washington periodically; the technique works under current law, but the law can change.

How does a SLAT work?

A SLAT is an irrevocable trust one spouse creates and funds for the benefit of the other spouse, and usually children and grandchildren as well. The funding spouse uses gift tax exemption to move assets out of both spouses' estates. Because the beneficiary spouse can receive distributions, the household retains indirect access to the wealth while the assets, and all their future growth, sit outside the taxable estate.

SLATs became the workhorse of the pre-2026 gifting wave for an understandable reason: they answer the most common objection to large gifts, which is "what if we need it back." For a couple confident in their marriage and holding more than they will spend, a SLAT can be the most livable way to use a $15 million exemption.

The risks that deserve equal billing

The access is indirect and conditional. If the beneficiary spouse dies first, the survivor's access to the trust generally ends; the assets continue for the children, but the funding spouse cannot reach them. Divorce creates a harsher version of the same problem, since the trust may continue to benefit a former spouse. Some drafting techniques mitigate these outcomes, but none eliminates them.

Couples who create two SLATs, one for each spouse, must contend with the reciprocal trust doctrine. If the two trusts are substantially identical, the IRS can "uncross" them and pull both back into the respective estates. Attorneys address this by varying terms, beneficiaries, trustees, funding amounts, and timing, which is precisely the kind of detail that separates careful planning from a template. Finally, SLAT assets do not receive a basis step-up at death; low-basis assets carry their gains with them.

How does an IDGT work, and why would anyone want a "defective" trust?

The name is the worst thing about the structure. An intentionally defective grantor trust is an irrevocable trust drafted so that it is out of your estate for estate tax purposes but still yours for income tax purposes. The "defect" is deliberate: you, the grantor, keep paying the income tax on the trust's earnings.

That feature is quietly powerful twice over. First, every tax payment you make on the trust's behalf is, in economic effect, an additional tax-free gift; the trust compounds gross of tax while your taxable estate shrinks by the tax bills. Second, because you and the trust are the same taxpayer, you can sell assets to the trust without recognizing capital gain.

The classic transaction is an installment sale. In a hypothetical, a business owner seeds an IDGT with a $2 million gift, then sells the trust $20 million of interests in his company in exchange for a promissory note paying interest at the IRS minimum rate (the applicable federal rate). The customary practice is to seed the trust with roughly 10 percent of the purchase price so the note has substance. If the business grows at 12 percent while the note rate is around 5 percent, the spread compounds inside the trust for the children. The sale freezes the owner's estate at the note's value; the growth happens elsewhere.

IDGT sales fit owners of businesses and other assets expected to outgrow the AFR, particularly when interests can be valued with discounts for lack of control and marketability. The risks: valuation challenges from the IRS on hard-to-value assets, the possibility the asset underperforms the note and the strategy transfers nothing, complexity and ongoing administration, and unsettled law on some questions if the grantor dies while the note is outstanding. This is a structure that requires experienced counsel, a defensible appraisal, and ongoing coordination among attorney, CPA, and adviser.

What makes a dynasty trust different?

The first three structures answer "how do we move assets out of our estate." A dynasty trust answers a different question: once moved, how long can wealth stay out of the transfer tax system. The answer, in the right state, is generations, and in some states forever.

A dynasty trust is a long-term irrevocable trust, typically funded with gift exemption and shielded from the generation-skipping transfer tax by allocating GST exemption, now $15 million per person, at funding. Once exempt, the trust can pass assets from children to grandchildren to great-grandchildren without estate tax, gift tax, or GST tax at any generation, for as long as state law allows the trust to last.

Duration depends on state law. Many states still limit trusts under some version of the rule against perpetuities, but a number of states, including South Dakota, Delaware, and Wisconsin, have abolished or allow opting out of the rule, permitting trusts of effectively unlimited duration. Situs choice also affects state income taxation of the trust, creditor protection, and trust administration law, which is why dynasty trusts are often established in a state other than where the family lives.

The hypothetical arithmetic is striking. $15 million growing at 7 percent for 60 years is roughly $870 million. Held outright and passed through two estates at a 40 percent rate, the family would keep only a fraction of that; held in a GST-exempt dynasty trust, transfer tax never touches it. The tradeoffs are equally generational: the terms you draft today will govern descendants you will never meet, trustees must be chosen and succession planned, beneficiaries do not own the assets outright, and there is no automatic basis step-up as generations pass. Good dynasty trusts pair tax design with governance: distribution standards, trustee selection, and family education matter as much as the tax clause.

Which trust fits which situation?

These tools also combine. A SLAT is often drafted as a grantor trust with dynasty provisions; an IDGT sale is frequently made to a GST-exempt dynasty trust; GRAT remainders can pour into trusts for children. The architecture should follow the family's goals, not the other way around.

A note on sequence. The right order of operations is to define what you and your spouse need for the rest of your lives, with margin for long lives and bad markets, before deciding what is truly surplus. Trusts transfer surplus well; they transfer regret poorly. Families who quantify their own lifetime needs first tend to fund these structures with confidence rather than second thoughts, and they avoid the most common failure mode, which is giving away assets the donors later wish they had kept. That analysis is a planning exercise, not a legal one, and it belongs at the front of the process.

Frequently asked questions

Do these trusts still matter now that the exemption is $15 million?Yes, for families above or growing toward the exemption. The structures remove future appreciation from the estate, and GRATs in particular transfer wealth while consuming little exemption at all.

Are these strategies legal and accepted?All four are established techniques grounded in the Internal Revenue Code, regulations, and case law. Aggressive implementations, especially around valuation, draw IRS scrutiny, which is why qualified appraisals and experienced counsel matter.

Can I be the trustee of a trust I create?Generally you should not control beneficial enjoyment of a trust designed to be outside your estate. Independent or institutional trustees, with family members in defined roles, are the common solution.

What does it cost to set up and run these trusts?Legal fees for design and drafting typically run from several thousand dollars for a simple GRAT to substantially more for an IDGT sale with appraisals, plus ongoing trustee, tax preparation, and administration costs. The economics usually make sense only when the amounts at stake are large relative to those costs.

What happens to a grantor trust when the grantor dies?Grantor trust status ends, the trust becomes its own taxpayer, and assets in the trust generally do not receive a basis step-up. Any outstanding installment note to the grantor becomes an estate asset.

Can these trusts be undone if circumstances change?They are irrevocable, but modern drafting builds in flexibility: trust protectors, powers of appointment, decanting under state law, and discretionary distribution standards. Flexibility must be designed in at the start.