GRAT vs. IDGT vs. Portability: How to Calculate Estate Tax Savings Step by Step on a $6M Asset in 2026
GRAT vs. IDGT vs. Portability: How to Calculate Estate Tax Savings Step by Step on a $6M Asset in 2026
Most estate planning conversations start with a proposal, not a formula. Your advisor hands you a document recommending a GRAT or an IDGT, and you nod along because the math feels opaque. But here's the thing Mr. Money Mustache gets right about "shockingly simple math" in financial planning: once you see the actual formula, the numbers aren't nearly as intimidating as the jargon suggests — and the differences between strategies become immediately legible.
NerdWallet's recent roundup of top financial questions confirms it: estate planning ranks as one of the most-asked-about but least-understood topics. People know they need to do something. What they lack is the formula to know which something is worth doing for their specific numbers.
This post gives you that formula. We'll use a real scenario — a $6M asset, today's 4.8% IRS 7520 hurdle rate, and two growth assumptions — to show you exactly how to calculate what each strategy saves. Then we'll show you where your individual variables change the answer entirely.
The Scenario
Single individual, age 62. Total estate: $18M. One asset — a closely held business interest worth $6M — is the primary target for transfer planning. The rest of the estate sits in retirement accounts and real property.
- 2026 federal estate tax exemption: $13.61M
- Taxable estate above exemption: $18M − $13.61M = $4.39M
- Federal estate tax owed with no planning: $4.39M × 40% = $1,756,000
- IRS 7520 rate (April/May 2026): 4.8%
That $1,756,000 bill is the baseline. Everything below is about how much of it you can legally eliminate — and the answer depends almost entirely on which formula you apply and how your asset performs.
Step 1: The GRAT Formula
A Grantor Retained Annuity Trust works by transferring an asset into a trust, taking back annual payments (annuities) for a fixed term, and passing whatever's left to heirs with zero or minimal gift tax. The magic is that the IRS prices the "gift" using their 4.8% hurdle rate — if your asset grows faster, the excess escapes your estate for free.
How to size the annuity for a "zeroed-out" GRAT (gift value = $0):
The annuity payment equals the asset value divided by the present value annuity factor at the IRS hurdle rate.
PV annuity factor (5-year term, 4.8%):
Step 1: Calculate 1.048⁵ = 1.2646 Step 2: Take the inverse: 1 ÷ 1.2646 = 0.7908 Step 3: Subtract from 1: 1 − 0.7908 = 0.2092 Step 4: Divide by 0.048: 0.2092 ÷ 0.048 = 4.358
Annual annuity = $6,000,000 ÷ 4.358 = $1,376,778/year
Now, what actually ends up in your heirs' hands depends on whether the business grows above 4.8%. Here's the year-by-year math at two growth scenarios:
| Year | Balance (9% Growth) | Annuity Paid | Remaining | Balance (12% Growth) | Annuity Paid | Remaining |
|---|---|---|---|---|---|---|
| 1 | $6,540,000 | $1,376,778 | $5,163,222 | $6,720,000 | $1,376,778 | $5,343,222 |
| 2 | $5,627,912 | $1,376,778 | $4,251,134 | $5,984,409 | $1,376,778 | $4,607,631 |
| 3 | $4,633,736 | $1,376,778 | $3,256,958 | $5,160,547 | $1,376,778 | $3,783,769 |
| 4 | $3,550,084 | $1,376,778 | $2,173,306 | $4,237,821 | $1,376,778 | $2,861,043 |
| 5 | $2,368,904 | $1,376,778 | $992,126 | $3,204,368 | $1,376,778 | $1,827,590 |
GRAT tax savings:
- At 9% growth: $992,126 × 40% = $396,850 saved
- At 12% growth: $1,827,590 × 40% = $731,036 saved
Not bad — but notice that the GRAT is working hard just to transfer roughly $1M–$1.8M out of a $6M asset. The hurdle rate is doing real work here. This is the kind of analysis Voritanel runs for you — modeling the full year-by-year GRAT schedule across multiple growth assumptions so you're not eyeballing a single scenario.
Step 2: The IDGT Formula
An Intentionally Defective Grantor Trust (IDGT) works differently. You gift or sell the $6M asset to the trust using your lifetime gift tax exemption. The asset then grows entirely outside your estate, and all income taxes on trust earnings are paid by you personally — which is itself an additional tax-free gift to the trust beneficiaries.
The calculation is more direct:
- Asset transferred: $6,000,000
- Growth at 9% over 5 years: $6,000,000 × 1.09⁵ = $6,000,000 × 1.5386 = $9,231,600
- Growth captured outside estate: $9,231,600 − $6,000,000 = $3,231,600
- Estate tax saved on that growth: $3,231,600 × 40% = $1,292,640
- At 12% growth: $6,000,000 × 1.12⁵ = $10,576,128 → growth = $4,576,128 → tax saved: $1,830,451
But here's the trade-off the numbers reveal: the IDGT consumes $6M of your $13.61M lifetime exemption. That leaves you $7.61M for future planning, other transfers, or the annual exclusion strategy. If you have a spouse and want to preserve portability, that calculus shifts further.
| Strategy | Asset to Heirs (9% growth) | Asset to Heirs (12% growth) | Exemption Used | Gift Tax Risk |
|---|---|---|---|---|
| No planning | $6M (estate-taxed at ~22% effective) | $6M (estate-taxed) | $0 | None |
| 5-Year GRAT | $992,126 passes free | $1,827,590 passes free | $0 | None if zeroed-out |
| IDGT (gift) | $9,231,600 fully outside estate | $10,576,128 fully outside estate | $6,000,000 | Exemption consumed |
| IDGT (installment sale) | $9,231,600 outside estate | $10,576,128 outside estate | Minimal (seed gift ~$300K) | Low |
The IDGT via installment sale — where the trust pays you back with a promissory note at the IRS rate — is often the highest-leverage move because it minimizes exemption consumption. But it requires the asset to grow above the note's interest rate to be net-positive. We've done a detailed head-to-head of these three approaches in GRAT vs. IDGT vs. Direct Gift on a $10M Asset, if you want to see the full comparison across different growth scenarios.
But your numbers will differ based on your specific situation — especially your remaining exemption, your asset's realistic growth rate, and whether you're married.
Step 3: The Portability Calculation
Portability is the "set it and forget it" option for married couples. If your spouse dies without fully using their $13.61M exemption, you can elect portability and inherit their unused amount — giving you a combined shield of up to $27.22M. The math is deceptively simple:
Portability value = Deceased spouse's unused exemption × 40%
Example: Spouse dies with $8M estate. Unused exemption = $13.61M − $8M = $5.61M.
- Portability election captures: $5,610,000
- Future estate tax avoided: $5,610,000 × 40% = $2,244,000
- Cost to elect: filing a timely estate tax return = roughly $3,000–$8,000 in professional fees
That's a phenomenal return on $8,000. The catch? Portability is fixed at the date-of-death exemption amount with no inflation adjustment, it disappears if the surviving spouse remarries and that spouse predeceases them, and it does nothing for Generation-Skipping Transfer (GST) tax — the 40% tax applied to transfers that skip a generation entirely.
For a couple with an $18M joint estate, portability alone may not be enough if the exemption sunsets in 2026 — a scenario where the per-person exemption could drop to approximately $7M, cutting the joint shield from $27.22M to $14M and leaving $4M+ newly exposed to the 40% rate. As we've detailed in GRAT vs. IDGT vs. Portability Election on a $15M Estate, the portability-only strategy has a hard break-even point that the sunset makes more urgent.
You can model this for your specific situation at Voritanel.
Step 4: Step-Up in Basis — the Formula Nobody Talks About
One reason the IDGT analysis above isn't complete without a basis conversation: assets you gift during life don't get a step-up in basis at death. The $6M business transferred to an IDGT at a $2M original cost basis means heirs inherit a $4M embedded gain — taxable at capital gains rates when they sell.
Step-up in basis formula:
- Retained in estate (no IDGT): Basis resets to fair market value at death. Embedded gain = $0.
- Gifted via IDGT: Basis carries over. Embedded gain = Sale price − $2M original cost.
If the asset is worth $9.23M at sale and basis is $2M:
- Capital gain: $7.23M
- Federal long-term CGT at 20% + 3.8% NIIT: $7.23M × 23.8% = $1,720,740
Versus holding in estate: zero capital gains tax on death, but potentially $1.75M+ in estate tax.
The true break-even between IDGT and holding depends on: your marginal estate tax rate, the embedded gain, your heirs' tax rate, and when they plan to sell. Miss any one of those variables and your "savings" analysis is off by six figures. This is exactly why what's hidden in your estate planning cost picture matters more than the headline strategy.
What the Numbers Actually Tell You
Here's the honest summary across our $6M asset, $18M estate scenario:
| Strategy | 5-Year Tax Savings (9% growth) | 5-Year Tax Savings (12% growth) | Key Risk |
|---|---|---|---|
| GRAT (5-year) | $396,850 | $731,036 | Mortality risk; no savings if growth misses 4.8% |
| IDGT (gift) | $1,292,640 | $1,830,451 | Consumes $6M exemption; carryover basis cost |
| IDGT (installment sale) | ~$1,200,000 | ~$1,750,000 | Note interest rate drag; trust must outperform |
| Portability only | $2,244,000 (couple, one death) | Same | Sunset risk; no GST benefit |
| No planning | $0 | $0 | $1,756,000+ bill |
The IDGT wins on raw savings — until you account for basis, exemption opportunity cost, and what happens if the TCJA sunset cuts your remaining exemption to $7M while you've already gifted $6M of it. At that point, the GRAT's "use no exemption" structure looks a lot more attractive.
As mortgage rates ticked slightly lower this week according to NerdWallet's April 17 mortgage rate report — signaling a broader rate environment that also influences where the IRS 7520 rate lands in coming months — the GRAT's sensitivity to hurdle rates bears watching. A drop from 4.8% to 4.2% meaningfully lowers the annuity bar and increases the remainder that passes to heirs.
The Variables That Change Everything
These formulas give you the framework. But the actual number for your situation shifts based on:
- Your asset's realistic growth rate (conservative vs. aggressive business valuations)
- Your remaining lifetime exemption (especially if you've made prior taxable gifts)
- State estate tax (Massachusetts, Oregon, and Washington tax estates well below the federal floor)
- Your age and health (GRAT mortality risk is real — if you don't survive the term, the asset re-enters your estate)
- Your heirs' tax rates (embedded capital gains are more costly if they're in higher brackets)
- Whether you're married (portability changes the entire calculus)
You don't need an MBA to run these numbers — but you do need a tool that takes your specific inputs rather than generic round-number assumptions. Voritanel was built precisely because generic advice ignores the variables that determine which strategy actually wins for your estate. Run the formula for your $6M — or your $2M, or your $15M — and see what the math actually says before you commit to any structure.
Sources
- Your Top April Questions: Tax Refunds, Debt and More — NerdWallet
- The Shockingly Simple Math Behind Social Security — Mr. Money Mustache
- The Guide to Wells Fargo Transfer Partners — NerdWallet
- Mortgage Rates Today, Friday, April 17: A Little Lower — NerdWallet
- Coffee Shop Insurance: What You Need, Best Companies — NerdWallet