Definition of Grantor Retained Annuity Trust (GRAT)

irrevocable trust into which the grantor places assets and receives in turn a fixed amount of income from a fixed annuity (amount of income stipulated at the time the trust is established) for either a given number of years, or for the lesser of a given number of years, or until the grantor's death. When the term of the trust expires, assets in the trust to include any appreciation are distributed to the named remainder beneficiary(s). If the assets in the trust fail to generate sufficient income to make the required annuity payments, the principal of the asset on deposit in the trust must be liquidated in an amount needed to meet the required income payments. This principal could diminish dramatically by the time it is transferred to the remainder beneficiary(s). If the grantor is alive when the trust terminates, the assets and their appreciation within the trust are not included in the grantor's estate.