That said, GRATs contain some caveats. “Ultimately, the success of a GRAT is almost solely dependent on the performance of the underlying assets,” said Fritz Glasser, CIMA, CEO and co-founder of Optas Capital in San Francisco. “If the underlying assets do not appreciate as expected, you might not successfully transfer a significant amount outside of your estate after paying for potentially expensive legal, accounting and appraisal fees.”
Legal fees, especially initially, can be a drawback if the GRAT is unsuccessful. Other drawbacks include the risk that the client dies during the term of the GRAT before payments back to the grantor have ended.
Also, GRATs aren’t useful in generation-skipping transfers, as the generation-skipping tax exemption can’t be applied to a GRAT until the grantor’s death, “by which point the value of the trust assets may have greatly appreciated,” Gerry Joyce said, adding that these trusts often benefit from active oversight and management.
In addition, several Democratic proposals seek to limit the effectiveness of GRATs, including a minimum term of 10 years and requiring calculations that would force the structure to result in a gift at inception.
With looming changes in Washington and maybe in interest rates, this "could be the year of the GRAT," Joyce said, "and perhaps the last year that GRATs were such an effective estate-planning tool."