Pre-IPO stock is one of the more compelling planning assets for founders and early employees—and the growth potential that makes it exciting is exactly what makes a Grantor Retained Annuity Trust (GRAT) worth understanding.
Here's how it works: you contribute shares to the GRAT and receive annuity payments back over a fixed term. Those payments are sized to return your contributed value plus an IRS benchmark called the Section 7520 rate—which fluctuates monthly and is currently in the mid-single digits. Any growth above that hurdle can pass to heirs with little or no gift tax, depending on timing and structure.
Here's an Example
Fund a GRAT with $2M of pre-IPO stock. If the company exits at $20M during the term, a substantial portion of that appreciation above the hurdle—potentially many millions—may pass to the next generation, depending on how the annuity is structured and when liquidity occurs.
For early employees, the window often opens after an early exercise, when the 409A valuation is still low and shares are already held outright. Contributing at that lower value increases the spread between what goes in and what may ultimately transfer.
If the stock underperforms, the annuity typically pulls most or all assets back to you—generally with little or no taxable gift. The strategy can often be revisited.
Two Constraints Worth Knowing:
You need to survive the GRAT term for the transfer to succeed, which is why shorter terms of 2–3 years are common. And while GRATs are currently permitted, Congress has periodically proposed restricting them—which is part of why timing matters.
For anyone approaching a liquidity event with low-basis, high-growth equity, this is a strategy worth having on your radar early.
This post is for educational purposes only and is not intended as legal, tax, or financial advice. GRAT planning is highly fact-specific and should be evaluated with qualified professional advisors.