Just what is a GRAT and why should any of us be concerned with its use? In my opinion, it is important to understand that when the über wealthy complain about any tweaking of the estate tax, most of them pay little or no estate or gift taxes due to the use of techniques like the GRAT. Just how does a GRAT work?

Simply put, the donor transfers money or stock into a trust and if the assets increase in value, any increase in the stocks beyond the principal and the minimum interest rate that must be paid back to the donor, goes directly to the beneficiaries tax-free. When you are talking assets worth millions and in some cases, billions, huge sums of money can escape the estate and gift tax process entirely.

Just how could this process be legal? The IRS didn’t think it was legal when a Walton family member used it and sued the IRS when they disallowed the trust. The Walton family member was successful in court and the GRAT was officially validated.

In fact, the attorney who first devised the GRAT, Richard Covey, claims that the use of the GRAT technique has cost the United States government billions. “These tax shelters may have cost the federal government more than $100 billion since 2000, says Richard Covey, the lawyer who pioneered the maneuver. That’s equivalent to about one-third of all estate and gift taxes the U.S. has collected since then.