Which Trust Strategy? IDGT, GRAT, SLAT, Dynasty Trust, and QPRT Compared

Estate planning at $5M+ net worth typically involves one or more irrevocable trusts. The question isn't whether to use a trust — it's which one, funded with what, and when. This guide covers the five primary strategies, how they work mechanically, and a decision framework for choosing.

Quick reference: five trusts at a glance

1. IDGT — Intentionally Defective Grantor Trust

An IDGT is an irrevocable trust deliberately structured to be "defective" for income tax — meaning the grantor (you) continues to pay income taxes on trust earnings — while being fully outside your estate for estate tax purposes. This "defect" is intentional because paying income tax on trust earnings is effectively a tax-free gift to the trust each year: the trust grows untaxed while your estate shrinks by the taxes you're paying on its behalf.²

How the defect is created

The drafting attorney inserts one or more grantor trust "triggers" drawn from IRC §§671-679. Common triggers include:

• Substitution power (§675(4)(C)): grantor can swap personal assets of equivalent value for trust assets — widely used, clearly approved by IRS Rev. Rul. 2008-22
• Right to reacquire by substitution: similar to above; no right to trust income required
• Spousal interest (§677): trust income can be distributed to spouse — often combined with SLAT structure

Two funding approaches

Gift to IDGT

Contribute appreciated assets to the trust as a gift, using your lifetime exemption. The gift removes both the current value and all future appreciation from your estate. Best for assets you own at relatively low basis where a future sale by the trust (not you) avoids capital gains — the trust can sell inside without recognition to you (because you're the grantor for income tax).

Installment sale to IDGT

Sell appreciated assets to the IDGT in exchange for a promissory note at the current Applicable Federal Rate (AFR). Because you and the trust are treated as the same taxpayer for income tax purposes, no capital gains are triggered on the sale. Future appreciation above the note's interest rate passes to heirs gift-tax and capital-gains free.³

Example: You hold a business interest valued at $8M at a low cost basis. You sell it to your IDGT for an $8M promissory note at the long-term AFR. The business grows to $20M over 10 years. The $12M appreciation has left your estate at zero gift, estate, or capital gains tax. You collect the note payments over time, which reduces your estate further as cash is paid into the trust.

Best for

• Business owners holding closely-held interests with significant expected appreciation
• Pre-IPO or pre-liquidity event stock (exercise timing + valuation discount + sale to IDGT)
• Real estate expected to appreciate significantly; avoids carryover basis problem of gifting to heirs directly
• High-income households where paying trust income tax each year meaningfully reduces the taxable estate

2. GRAT — Grantor Retained Annuity Trust

The grantor contributes assets and receives back a fixed annuity stream over a defined term — typically 2 to 10 years. If the assets grow at a rate above the IRS §7520 hurdle rate (4.6% for April 2026),⁴ the excess appreciation passes to heirs with zero or minimal gift tax at the end of the term.

Zeroed-out GRAT mechanics

Set the annuity payment high enough that the present value of all annuity payments equals the contributed value — making the computed gift zero. Any growth above the 4.6% hurdle rate escapes into the remainder trust for heirs. With high-growth assets (a startup equity stake, a rental portfolio in a rising market), even a modestly positive spread above 4.6% transfers significant wealth.

Example: fund a 5-year GRAT with $3M in a private equity fund expected to grow at 15%/year. If the fund hits that projection, the GRAT pays back approximately $3M in annuities (zeroed out) while $3.8M in appreciation passes to heirs — zero gift tax.

Limitations of GRATs at a 4.6% hurdle

At higher §7520 rates, GRATs work best for assets with exceptional expected growth. Bonds, balanced portfolios, and slow-growth real estate are unlikely to produce meaningful remainder over a 4.6% hurdle. The GRAT strategy is most compelling for concentrated pre-liquidity positions, founder shares, or private equity allocated to high-growth vintages.

GRATs also do not use the GST exemption — the remainder typically passes to children, not grandchildren, to avoid the GST tax problem. For multi-generational transfer, a GRAT passes assets to children who then need their own strategies. See our interactive SLAT vs GRAT calculator to compare how each performs with your specific assets.

Best for

• Specific high-growth assets (pre-IPO equity, closely-held business stake, private credit fund)
• Single individuals who can't use a SLAT (no spouse)
• Situations where you want to minimize gift tax cost while betting on a specific appreciation outcome

3. SLAT — Spousal Lifetime Access Trust

A SLAT is an irrevocable trust where one spouse (the "donor spouse") funds the trust using their lifetime gift exemption, and the other spouse (the "beneficiary spouse") can receive distributions — income or principal — for their health, education, maintenance, and support. Assets leave the donor's taxable estate, but the married couple maintains indirect access through the beneficiary spouse.

The reciprocal trust doctrine risk

If both spouses create SLATs for each other — a common desire, since it doubles the amount moved out of the estate — the IRS may treat the two trusts as reciprocal and unwind both, pulling the assets back into each spouse's estate. Courts have found reciprocal trust doctrine violations when the trusts are substantially identical.⁵

Mitigation: differentiate the trusts. Different funding dates (6–12 months apart), different asset types, different annuity/distribution terms, different trustees, different term lengths. The more the trusts differ in substance, the less likely the reciprocal doctrine applies.

SLAT vs IDGT: can you combine them?

Yes. A SLAT can be structured as a grantor trust (using the spousal beneficiary trigger under §677), making it effectively a SLAT-IDGT hybrid. The grantor pays income tax on trust earnings (the hidden-gift benefit), and the beneficiary spouse retains income access. This is a common structure for couples who want both benefits. See our SLAT vs GRAT calculator for the side-by-side transfer math.

Best for

• Married couples with net worth above the federal exemption ($15M/individual) or in a state with lower estate tax thresholds
• Couples who want to use lifetime exemption now but are uncomfortable giving up all access
• Families where the beneficiary spouse handles day-to-day spending — trust distributions replace out-of-estate spending

4. Dynasty Trust

A dynasty trust (also called a generation-skipping trust) holds assets across multiple generations — children, grandchildren, great-grandchildren — without those assets being re-taxed at each generation's death. Funded with the GST exemption ($15M per individual in 2026),¹ the trust is fully exempt from GST tax at every generational transfer, potentially indefinitely.

A $10M dynasty trust at 7% annual growth reaches $38.7M in 20 years and $149.7M in 40 years, untouched by estate or GST tax at any point. See our dynasty trust guide for detailed mechanics, best states (SD, NV, DE, WY), trustee structures, and the full compounding math.

Best for

• Families with $10M+ who have a multi-generational horizon
• Situations where clients have already maximized SLATs and GRATs and have remaining exemption
• Business succession: keep operating business inside a dynasty trust to avoid estate tax at each generation

5. QPRT — Qualified Personal Residence Trust

A QPRT transfers a primary or vacation residence to an irrevocable trust at a discounted gift tax value, while you retain the right to live there for a fixed term — typically 5 to 15 years. At the end of the term, ownership passes to heirs. You must then pay fair market rent to remain in the home.

Why the discounted value matters

The taxable gift is not the full fair market value of the home — it's the actuarially computed present value of the remainder interest (what passes to heirs after your retained term ends). The IRS uses the §7520 rate (4.6% in April 2026) and your age to discount that remainder. The higher the §7520 rate and the longer your term, the deeper the discount, and the less lifetime exemption you use.⁴

Example: a 60-year-old transfers a $4M primary residence into a 10-year QPRT. Using the §7520 rate and actuarial tables, the computed gift might be approximately $1.8M–$2.2M (depending on age and current rate) — far less than the $4M full value. If the home appreciates to $5M by year 10, $5M passes to heirs at a gift tax cost computed on ~$2M. The $3M appreciation in excess of the computed gift escapes entirely.

Risks

• Grantor must survive the term. If you die during the trust term, the residence is pulled back into your estate as if the QPRT never happened. Many clients hedge by life-insuring this risk or by choosing shorter terms.
• You must pay rent after term ends. If you want to continue living in the home, you pay fair market rent to the trust (which is now owned by your heirs or their trust). The rent payments are an additional transfer out of your estate — some clients view this as a feature.
• No step-up in basis at death. Since the residence passed via gift (not death), heirs get your carryover basis, not a stepped-up basis. If the home has low cost basis, this can be significant. Weigh against the estate tax savings with our step-up basis calculator.
• Doesn't work well at low §7520 rates. With a 4.6% rate in April 2026, QPRTs are better than they were when rates were near zero in 2020–2021 — the discount is more meaningful at higher hurdle rates.

Best for

• Large primary residences or vacation homes expected to appreciate significantly
• Clients with strong health and long life expectancy who can comfortably commit to a 5–15 year term
• Clients with significant estate tax exposure in states with lower exemptions (e.g., NY, MA, OR)
• Situations where the clients value continuing to live in the home and are comfortable paying rent to heirs/trust post-term

Decision framework: which trust fits your situation?

What the advisor coordinates across these strategies

None of these strategies exist in isolation. The estate planning advisor's job is to:

• Sequence the strategies — which trust to fund first, with what assets, in what order
• Coordinate with your CPA on grantor trust status, income tax filings, and the interaction with your existing tax picture
• Coordinate with your trust-and-estates attorney who drafts the trust documents — the advisor drives the financial strategy, the attorney executes it legally
• Manage the funding — which assets go into which trust, and how to value private business interests or real estate correctly at the time of transfer
• Revisit annually — tax law changes (OBBBA just rewrote the landscape), AFR shifts, family circumstances, and state estate tax exposure all affect which strategy is optimal each year