Caterpillar Employees: How a GRAT Can Support a Tax-Efficient Wealth Transfer

Healthcare Provider Update: Healthcare Provider for Caterpillar: Caterpillar Inc. primarily offers its employees healthcare benefits through various providers, including Blue Cross Blue Shield, Cigna, and UnitedHealthcare. These providers typically offer a range of healthcare plans catering to the diverse needs of Caterpillar's workforce. Potential Healthcare Cost Increases in 2026: As healthcare costs rise, Caterpillar may face significant increases in its healthcare expenditures in 2026. The anticipated uptick in Affordable Care Act (ACA) premiums could lead to an inflationary impact on company-sponsored health plans, with reports suggesting that companies like Caterpillar might see costs soar due to a perfect storm of increasing medical expenses and the potential expiration of enhanced federal premium subsidies. Consequently, the company could experience upwards of 8.5% in healthcare cost increases in 2026, reflecting broader industry trends and putting additional pressure on corporate healthcare budgets. Click here to learn more

'Grantor retained annuity trusts can be a powerful way for Caterpillar employees to transfer future asset growth efficiently, as long as they're structured correctly in coordination with estate planning professionals.' — Wesley Boudreaux, a representative of The Retirement Group, a division of Wealth Enhancement.

'Caterpillar employees considering a GRAT should view it as a disciplined estate planning approach that allows them to pass future asset growth efficiently, with the help of qualified estate and tax professionals.' — Patrick Ray, a representative of The Retirement Group, a division of Wealth Enhancement.

In this article, we will discuss:

1. How a Grantor Retained Annuity Trust (GRAT) can function as part of a comprehensive estate plan.

2. Key advantages and potential considerations when using a GRAT strategy.

3. Why GRATs may be particularly valuable for Caterpillar employees with appreciating assets.

Important Takeaways

A Grantor Retained Annuity Trust (GRAT) can play a meaningful role in an estate plan for Caterpillar employees who hold assets anticipated to increase in value substantially over time.

With a GRAT, the grantor transfers assets to an irrevocable trust while receiving fixed annuity payments for a set period. If the trust’s assets perform better than the IRS Section 7520 rate and the grantor lives through the term, the excess appreciation can pass to beneficiaries without additional gift tax and outside of the estate.

A “zeroed-out” GRAT enables the grantor to minimize or eliminate the use of the lifetime gift and estate tax exclusion, because the present value of the retained annuity nearly equals the value of the transferred assets.

Understanding the GRAT

A GRAT is an irrevocable trust that uses a small portion of the federal gift and estate tax exemption to shift future asset growth to heirs.

After funding the trust, the grantor retains the right to receive fixed annual annuity payments for a specified term. The annuity value is calculated using the IRS Section 7520 rate, which updates monthly and equals 120% of the applicable federal interest rate (AFR).

If the grantor lives through the term and the trust’s assets perform better than the 7520 rate, the appreciation can pass to heirs outside the taxable estate and without additional gift tax. This structure may be useful for Caterpillar professionals with equity-based compensation or assets that have meaningful growth potential.

How a GRAT Operates

A GRAT effectively “freezes” the taxable value of the transferred assets as of the funding date, allowing beneficiaries to benefit from growth above the Section 7520 rate. For gift tax purposes, the annuity payment is determined using the 7520 rate. If the grantor lives through the trust term, any remaining assets typically pass to heirs outside the estate.

Choosing the GRAT Term

Typical GRAT terms span two to ten years. A longer term may create more time for assets to grow relative to the Section 7520 rate. However, many individuals—including Caterpillar employees with fluctuating investment portfolios—prefer multiple short-term rolling GRATs, supporting flexibility in various market and interest rate environments.

Advantages of a Flexible GRAT

If a GRAT includes a replacement power under Internal Revenue Code §675(4)(C), the grantor may exchange assets of equal value during the trust term. This gives the grantor the option to substitute assets that may have stronger growth potential, provided proper documentation and compliance procedures are followed.

Transferring High-Growth Assets

Funding a GRAT with assets anticipated to grow significantly—such as marketable securities, private business interests, or pre-IPO shares—can be especially useful. Caterpillar employees with company stock or equity-based compensation may find GRATs advantageous for shifting growth potential to the next generation.

Structuring Annuity Payments

The IRS permits GRAT annuity payments to rise by as much as 20% annually, which may leave more principal in the trust early in the term, potentially supporting greater growth over time.

Tax Treatment

A GRAT is often treated as a grantor trust for income tax purposes, meaning the grantor reports trust gains, income, and losses on their personal return. The IRS does not treat the grantor’s payment of tax on trust income as an additional gift.

Risks and Considerations

If the grantor passes away during the GRAT term, the remaining trust assets—along with appreciation—are generally included in the taxable estate. In addition, if trust assets do not grow beyond the Section 7520 rate, the benefit to heirs may be limited because only annuity payments would return to the grantor.

Legislative updates have been introduced periodically to limit GRAT use, such as requiring minimum terms or a minimum remainder value, although no such changes have become law as of 2025.

Generation-Skipping Transfer Tax (GSTT)

A GRAT does not automatically bypass generation-skipping transfer tax. Due to Estate Tax Inclusion Period (ETIP) rules, GSTT exemption typically is applied after the trust term concludes. Working with estate planning counsel may help align timing and exemption decisions.

Should Caterpillar Employees Consider a GRAT?

For those interested in transferring wealth efficiently while managing gift tax exposure, a GRAT may be an effective planning tool. Results depend on the grantor’s lifespan, asset performance, and proper legal structuring. Caterpillar employees evaluating this strategy should seek guidance from an estate planning attorney or tax professional.

Need Guidance Tailored to Your Situation?

The Retirement Group assists individuals in understanding and improving estate and retirement planning strategies.

Call  (800) 900-5867  to speak with a knowledgeable professional who can help determine whether a GRAT—or another approach—suits your long-term goals.

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Sources:

• 1. U.S. Department of the Treasury, Internal Revenue Service.  “26 CFR §25.2702-3: Requirements for Qualified Interests (GRATs).”   Code of Federal Regulations , 2012 ed., Title 26, vol. 14, Government Publishing Office, Apr. 1 2012, pp. 1-2.

• 2. Badgley v. United States.  No. 18-16053, U.S. Court of Appeals for the Ninth Circuit, 28 Apr. 2020. pp. 6-7, 16-18.

• 3. Internal Revenue Service.  Notice 2003-72: Qualified Interests (Acquiescence to Walton).  3 Nov. 2003. IRS Bulletin 2003-44, pp. 964. Scott S. Landes, principal author.

• 4. Cornell Law School, Legal Information Institute.  “26 U.S.C. § 7520 – Valuation Tables.”  LII/USCode, Cornell University, updated 2025, law.cornell.edu/uscode/text/26/7520.

• 5. Impert, Walter M., and Mark G. Riedy. “A Review of Grantor Trusts.”  Real Property, Probate & Trust Journal , vol. 49, no. 1, Fall 2014, Dorsey & Whitney LLP, pp. 1-3.