A Grantor Retained Annuity Trust (GRAT) is a trust established for a fixed term with fixed annuity.  After the termination of the trust, the remainder is paid to the grantee (or remainderman).  This would include any income generated by the assets during the term of the trust, not paid to the donor in the form o f the annuity.  The annuity is a fixed dollar amount (as opposed to a GRUT where a fixed percentage of the fair market value is paid to the donor).

The goal of a GRAT is create a high present value therefore decreasing the remainder value (thus decreasing the value of the gift).  The optimum scenario for a GRAT is to result in a zero remainder interest.  However, because the value of the assets are frozen at the time of creation, the income generated by the assets is able to pass to the remaindermen tax free.  The shortest GRAT possible is two years.  On their own, a single two-year GRAT will leave on a negligible amount (if any) to the remaindermen.  However, because a GRAT is for a term of years, the donor must survive the term to see any benefit.  Multiple two year GRATs may be used for elderly donors where it is doubtful they would survive a longer term GRAT.

The earlier a GRAT can be used (the longer the expected life of the donor) the better return a donor can expect.  For an example, take a look at my previous blog on the Facebook founders GRATs.