GRAT vs. Gifting vs. Holding for Step-Up on $5M of Stock: The 40% vs. 23.8% Break-Even With Mortgage Rates Above 7%
Picture this. You hold $5 million of one appreciated stock. Your cost basis is $1 million. Your total estate is around $20 million, which is above the $15 million federal exemption for a single filer in 2026. Someone tells you to gift the stock now. Someone else says never give up the step-up in basis. A third person mentions a GRAT.
Which one is right? It depends on a handful of numbers. This post runs those numbers so you can see which ones matter.
Why This Week's Headlines Matter for a Trust Decision
Estate planning math doesn't happen in a vacuum. Three of this week's articles move the inputs.
Rates. NerdWallet's "Mortgage Rates Today, Monday, September 28: A Little Lower, But Still Above 7%" says rates dipped but remain solidly above 7%. That matters here because the IRS 7520 rate, the hurdle a GRAT has to beat, tracks Treasury yields. High yields mean a higher hurdle. Your asset has to grow faster than that rate for the GRAT to pass anything to heirs. For the longer version, see how a 0.2-point swing in rates changes a $10 million GRAT vs. IDGT.
The economy. The Bureau of Labor Statistics' "Major Economic Indicators" page shows CPI up 0.4% in August 2026, unemployment at 4.1%, and preliminary payroll growth of +162,000. That isn't a recession signal. It also isn't the kind of cooling that would pull rates down fast. Plan as if the hurdle stays elevated.
Concentration risk. Mr. Money Mustache's "Will the AI Bubble Destroy Our Retirement?" discusses how a market at record highs makes some people nervous and a crash makes others nervous. If your $5 million is in one high-flying stock, this question is personal. The decision isn't whether to guess the market. It's which structure holds up whether the stock doubles or halves.
For this post I'll assume a 4.8% hurdle rate. That is an illustrative figure I chose, not a quote. Check the current month's published 7520 rate before you rely on any of this.
The Three Options at a Glance
| Outright gift | 2-year GRAT | Hold for step-up | |
|---|---|---|---|
| Estate tax on growth | Removed from estate | Removed only if the stock beats the hurdle | Fully exposed above the exemption |
| Capital gains basis for heirs | Carryover ($1M basis) | Carryover ($1M basis) | Stepped up to value at death |
| Uses lifetime exemption | Yes, $5M | Near zero if zeroed out | No |
| Main risk | Lost step-up | Grantor dies during the term, or the stock underperforms | Estate tax at 40% on growth |
| Best when | Very high growth, or heirs won't sell | Volatile assets you expect to outperform | Estate is under the exemption, or growth is low |
This is the kind of comparison Voritanel runs with your actual basis, growth assumptions, and state, so you don't have to build the spreadsheet yourself.
Option 1: The Outright Gift vs. Holding — The 40% vs. 23.8% Trade
This one comes down to two tax rates.
- Federal estate tax on the excess over your exemption is 40%.
- Federal long-term capital gains plus the 3.8% net investment income tax is 23.8%. State tax is extra.
A gift moves future growth out of your estate. That saves 40% on the growth. It also gives up the step-up. The donee takes your $1 million carryover basis, so a later sale is taxed at 23.8% on almost all the gain.
Here is the 10-year math on the $5 million of stock at three growth rates. I'm assuming your estate stays above the exemption, and that the donee sells at year 10.
| Annual growth | Value at year 10 | Estate tax saved on growth (40%) | Capital gains cost of lost step-up (23.8%) | Net for gifting |
|---|---|---|---|---|
| 4% | $7.40M | $0.96M | $1.52M | Hold wins by about $563K |
| 8% | $10.79M | $2.32M | $2.33M | Roughly a wash (hold ahead by about $13K) |
| 12% | $15.53M | $4.21M | $3.46M | Gift wins by about $754K |
The calculation for the 8% row, so you can check it:
- $5,000,000 × 1.08¹⁰ = about $10.79 million.
- Growth removed from your estate: $10.79M − $5M = $5.79M, times 40% = $2.32M saved.
- Gain the donee would owe tax on: $10.79M − $1M basis = $9.79M, times 23.8% = $2.33M.
The break-even sits right around 8% annual growth over 10 years. Below that, holding for the step-up is better. Above it, gifting wins. That's why "always keep the step-up" and "always gift early" are both wrong.
Three variables can shift this result:
- If the donee never sells, the capital gains cost never materializes and the gift wins at any growth rate. Some families hold for decades. Others sell in year two.
- If your estate is under the exemption at death, there is no estate tax to save. The gift then only costs you the step-up, and holding wins outright. With the exemption at $15 million per person, this is the question that matters most. I go deeper on it in gifting appreciated stock vs. holding for the step-up.
- State taxes. A state estate tax with a low threshold changes the 40% number. A state capital gains tax changes the 23.8% number. They don't always move together.
Option 2: The GRAT — Heads You Win, Tails You Roughly Tie
A grantor retained annuity trust lets you put the stock in, take back annuity payments that return your principal plus the hurdle rate, and pass whatever is left to heirs. It's built so that the gift tax cost of setting it up is close to zero.
Here is a zeroed-out 2-year GRAT on the same $5 million at the 4.8% hurdle:
- Annuity factor for 2 years at 4.8%: about 1.8655.
- Annual payment: $5,000,000 ÷ 1.8655 = about $2.68 million.
What's left for heirs if the stock grows 8% a year:
- Year 1: $5.40M − $2.68M = $2.72M
- Year 2: $2.94M − $2.68M = about $257,000 remainder
At 12% growth, the remainder is about $590,000. At 4% growth, there's nothing left. At a 4.8% hurdle, you've broken even. Below 4.8%, the GRAT returns everything to you and the only cost is the legal and setup fees.
At a 40% estate tax rate, a $257,000 remainder saves roughly $103,000. A $590,000 remainder saves about $236,000. These savings look small next to the outright-gift numbers. Two reasons: a 2-year term captures little growth, and the GRAT doesn't burn any exemption. If your estate is over the exemption, you can repeat the GRAT. Some planners "roll" short-term GRATs so that one strong year gets locked in.
The GRAT also has a real downside I don't want to skip: if you die during the term, the assets are pulled back into your estate. A short term limits that risk. It doesn't remove it.
Retained payments are typically made in kind, meaning shares go back to you. Those shares keep the $1 million total basis as before. The GRAT doesn't change the basis problem, so the trade-off between estate tax and capital gains still applies to whatever passes to heirs.
For how the hurdle rate changes GRAT results between the two most common trust choices, see when a GRAT beats an IDGT and when it doesn't.
Where the AI-Bubble Question Fits
The Mr. Money Mustache piece is written for retirement savers, not estate planners. But it points at something important: your tax plan shouldn't depend on a market call.
Here is how each option looks under two market outcomes for the $5 million stock:
- The stock falls 40% and stays down. The gift uses $5 million of your exemption on an asset now worth $3 million. That's a real cost, because you can't get that exemption back. The GRAT just fails: you get your shares back, and the only loss is fees. Holding costs nothing but the drop itself.
- The stock triples. The GRAT works well, the outright gift works better, and holding is the most expensive route if your estate is over the exemption.
The GRAT is built for this uncertainty. It has limited downside and real upside. The outright gift gets the most from a big win and hurts most in a big loss. Neither choice is inherently smarter. Which one fits depends on how much of your wealth is in that stock and how well you sleep with the risk. If you want a deeper look at concentrated positions, see the 5-question checklist for a $20M estate.
The Bank Bonus Lesson: Sticker Price vs. Total Cost
NerdWallet's "Should I Switch to a New Bank Just to Earn a Bonus?" makes a point that carries over to estate planning: bonuses usually take effort to earn, so you have to weigh the effort and conditions against the payoff. A $300 bonus that needs three months of direct deposits and a $5,000 balance is not the same as $300 in your pocket.
Estate planning has the same trap. "Saves $2.3 million in estate tax" is the sticker. The total cost includes:
- Lost step-up on the gifted asset (up to $2.33 million in our 8% example)
- Legal and trustee fees for a GRAT or trust
- The risk of mortality during a GRAT term
- State-level tax differences
- Exemption you can't get back
If the exemption is used, it's used. That is a much bigger commitment than closing a bank account after the bonus posts.
A small, real version of this: the $19,000 annual gift tax exclusion per recipient. Two spouses giving to one child can move $38,000 a year without touching the lifetime exemption. Over 10 years that's $380,000 to one child. It isn't dramatic, and it has no step-up trade-off if you give cash instead of low-basis stock. That's a real advantage.
A Quick Decision Filter
Answer these before choosing an option:
- Is my estate likely to be over $15 million (or $30 million as a couple) at death? If no, holding for step-up usually wins and you can stop here. Also confirm the portability election is filed at the first death.
- Is the asset low-basis? The lower the basis, the more the step-up is worth.
- Do I expect growth above about 8% a year over the holding period? Above that, the estate-tax savings from removing growth beat the capital gains cost. Below it, they don't.
- Will the recipients sell? If not, the gift's capital gains cost may never be paid.
- Do I live in a state with its own estate tax? That can make planning matter even under the federal exemption. One example: a $9 million estate with $0 federal tax that still owed $947,500 in state tax.
Why Your Numbers Will Differ
The $5 million stock, $1 million basis, 8% growth, 10-year horizon, 4.8% hurdle, and 40% and 23.8% tax rates are all one worked example. They aren't a forecast and they aren't advice. Change any one of them and the answer can flip.
- A basis of $3 million instead of $1 million cuts the step-up value by about half.
- A 5-year horizon instead of 10 changes the compounding a lot.
- A state estate tax with a low threshold can make the estate-tax side larger.
- If the current 7520 rate is 5.2% instead of 4.8%, the GRAT remainder shrinks noticeably.
That last point is why the rate environment matters. With mortgage rates still above 7% and a 0.4% monthly CPI print, I wouldn't assume the hurdle is about to drop. But I also wouldn't assume it can't. If you want to see how rate moves shift the trust math, the Fed rate hike breakdown on a $5 million GRAT and IDGT walks through the dollar amounts.
What to Do With This
You don't need to pick a strategy from a blog post. You do need to know which of your own numbers decides the answer: your basis, your expected growth, your state, your estate's size relative to the exemption, and whether the recipients will sell.
You can enter those inputs and compare the outright gift, GRAT, and hold-for-step-up options side by side at Voritanel. It's built to show the break-even for your situation, not an average one. If the answer turns out to be "hold and do nothing," that's a perfectly good result. Then a qualified estate attorney can confirm the details before anything is signed.
Sources
- Mortgage Rates Today, Monday, September 28: A Little Lower, But Still Above 7% — NerdWallet
- Will the AI Bubble Destroy our Retirement? — Mr. Money Mustache
- Should I Switch to a New Bank Just to Earn a Bonus? — NerdWallet
- Major Economic Indicators Latest Numbers — Bureau of Labor Statistics
- This Tahoe Hotel Got a Glow-Up, but Missed a Few Spots — NerdWallet