The Ultimate Showdown: GRAT vs CRAT vs IDGT vs DST vs FLP – Which One Should You Use

5 Secret Money Moves the Ultra-Rich Use to Keep Their Cash:The Ultimate Showdown: GRAT vs CRAT vs IDGT vs DST vs FLP – Which One Should You Use

Dear friends,

Let’s be real: when you hear terms like “IDGT” or “GRAT,” your eyes glaze over. It sounds like stuff only people with private jets need to worry about.

But here’s the truth: these are the most powerful, battle-tested ways to pass down huge chunks of wealth and dodge massive taxes legally.

We’re breaking down the five secret strategies the Forbes list folks use, translating the jargon into plain English so you can see how to apply them to your own money goals.

1: The GRAT – The ‘Heads I Win, Tails I Break Even’ Gift Strategy

A Grantor Retained Annuity Trust (GRAT) is basically a legal way to bet on your investments getting super-rich, with the government footing the bill if you win. It’s the go-to play for someone who thinks their stock portfolio, real estate, or startup equity is about to explode in value.

The entire idea is based on exploiting a short-term loophole. You tell the IRS you are giving away a future gift, and they assume the assets will grow at a very low, fixed interest rate (called the “Section 7520 rate”).

If your assets grow faster than that low rate, the extra growth goes to your kids or beneficiaries totally tax-free. That extra growth is the gravy you want to keep.

Scenario: The Growth Play

Imagine you have stock options in a company that you think will IPO next year. You can put those options into a GRAT now, while their value is relatively low. If the IPO happens and the stock skyrockets, all that massive appreciation skips your taxable estate and goes straight to your family.

Key Action: Set up an irrevocable trust for a short period (usually 2-5 years).

Key Action: Transfer a high-growth asset (like pre-IPO stock or a high-performing real estate deal) into the GRAT.

Key Action: You (the grantor) receive fixed, annual annuity payments back from the trust for the specified term. The total of these payments is designed to almost equal the initial value of the asset, making the “gift” value to your kids nearly zero for tax purposes (a “zeroed-out” GRAT).

Takeaway: If the asset grows more than the IRS assumed rate, the excess growth is transferred to your beneficiaries with zero gift or estate tax. It’s a pure win-win, provided the asset performs.

The Catch (and How to Handle It):

If you pass away before the GRAT term ends, the full value of the assets goes right back into your estate, and the tax savings are lost. That’s why people often use short-term GRATs – to minimize the risk.

Deep Dive Strategy: Use a series of short-term GRATs (like two-year ones) instead of one long one. This lets you cycle the cash out faster and limits the risk of dying during the term, which is a major tax headache.

2: The IDGT – The ‘Intentionally Defective’ Tax Freeze

The Intentionally Defective Grantor Trust (IDGT) has a scary name, but it’s one of the most powerful estate-freezing tools out there. The “defective” part is intentional – it’s structured to be considered a completed gift (out of your estate) for estate tax purposes, but not for income tax purposes.

Why is that a big deal? Because when the trust makes money (like dividends or rent), you (the grantor) pay the income tax on it, even though the assets belong to the trust for estate tax purposes. By paying the tax, you are effectively making a tax-free gift to the trust every year, allowing the money for your kids to grow even faster without being eaten away by taxes.

Scenario: The Business Transfer

You have a rapidly growing business valued at $10 million today. You know it will be worth $50 million in ten years. You sell that $10 million business interest to your IDGT in exchange for a low-interest promissory note.

Key Action: You establish an IDGT and sell your high-growth asset to it, usually for an installment note that charges a minimum rate set by the IRS (the AFR or Applicable Federal Rate).

Key Action: You receive the low-interest note payments over time, which puts cash back in your pocket.

Key Action: The asset’s future growth ($40 million in this example) happens inside the IDGT, and it’s out of your estate. The sale price of $10 million is what’s ‘frozen’ for estate tax purposes.

Takeaway: You freeze the asset’s value at the time of the sale, pay a low rate of interest to yourself, and let all the future growth escape estate tax. Plus, you paying the income tax acts as an extra tax-free gift to the trust beneficiaries.

Why it’s a Master Play:

Unlike a GRAT, an IDGT often involves a sale, not a gift. This allows you to leverage your estate tax exemption more efficiently. The trust can grow almost limitlessly, and the only “taxable” value that might be left in your estate is the remaining promissory note you hold.

Advanced Tip: Use the IDGT to buy new assets you expect to jump in value. The cost of the asset is the note, and the growth is the tax-free reward.

3: The CRAT – The ‘Income Plus Charity’ Power Move

The Charitable Remainder Annuity Trust (CRAT) is the go-to structure when you want to achieve three things at once: a steady stream of retirement income, a massive upfront income tax deduction, and a generous donation to your favorite cause.

It’s similar to a GRAT, but the remainder (what’s left after your income payments end) goes to a qualified charity, not your family. This charitable intent is what unlocks the major tax breaks.

Scenario: The Highly Appreciated Asset

You own $3 million worth of stock in a single company that you bought years ago for $50,000. If you sell it, you face a huge capital gains tax bill. You want to diversify, get a steady income, and avoid that big tax hit.

Step 1: The Contribution

You transfer the appreciated stock (worth $3 million) into the CRAT. The CRAT sells the stock immediately. Crucially, the CRAT is a tax-exempt entity, so it pays zero capital gains tax on the sale. You have now turned a highly taxed asset into a full pool of cash, ready to be reinvested.

Step 2: The Income Stream

You (the grantor) receive a fixed annuity payment every year for a set term or for the rest of your life. This income is based on a fixed percentage of the initial asset value. This is your steady retirement paycheck.

Step 3: The Deduction and Legacy

Because you committed to leaving the remainder to charity, you get an immediate, massive income tax deduction in the year you set up the CRAT. The value of this deduction is based on the calculated future value of the charitable remainder. When the trust term ends, the remaining money goes to the charity you named.

Key Action: Transfer a highly appreciated, low-basis asset (like old stock or property) into the CRAT.

Key Action: Immediately claim a substantial income tax deduction for the present value of the future gift to charity.

Key Action: Receive a guaranteed, fixed annual income stream from the trust’s investments.

Takeaway: You get to sell a highly appreciated asset tax-free, generate a lifetime income, and claim a huge upfront tax break, all while funding a charity you care about.

GRAT vs. CRAT – The Quick Decider:

GRAT: Purpose is to pass wealth to family with minimal gift tax. The payments go back to you, and the remainder (hopefully big) goes to your family.
CRAT: Purpose is to secure your fixed income, get a tax deduction now, and leave the remainder (hopefully big) to charity.

PRO-TIP: If a client is generally “charitable minded” and wants to contribute a portion of their gains to improve humanity – we typically prefer to setup the Charitable trusts as they provide a lot more flexibility and control, especially when you couple them with Donor-Advised-Funds or Private-Foundations on the charitable end.

4: The DST – The ‘Passive Income, Deferred Tax’ Real Estate Hack

A Delaware Statutory Trust (DST) is a game-changer if you’re a real estate investor who just sold a property but doesn’t want to get crushed by capital gains taxes. It is almost exclusively used as a super-smooth way to complete a 1031 Exchange.

The standard 1031 Exchange rule says you have to replace the property you sold with another property of equal or greater value within a strict 180-day window to defer the capital gains tax. This is stressful. You have to find a new property, do due diligence, and deal with closing headaches, all on a tight clock.

A DST solves this by allowing you to buy a small, fractional ownership slice of a massive, institutional-quality property (like an apartment complex, medical office building, or warehouse).

Scenario: The 1031 Stress Relief

You sold a rental house for $800,000 and now have to reinvest that money to avoid a $150,000 capital gains tax bill. You can’t find a good single property in time.

Step 1: The Exchange

You move the $800,000 from the sale of your rental property into a DST holding account. This starts the 1031 exchange process.

Step 2: The Buy-In

You buy $800,000 worth of “beneficial interest” in a DST that owns, say, a $50 million apartment complex in a high-growth city. You are now a fractional owner.

Step 3: Passive Management

You get a monthly cash distribution (income) from the property’s rent, but you don’t manage anything. The trust manager handles all the tenants, maintenance, and headaches. This is truly passive investing, while keeping your capital gains tax deferred.

Key Action: Use the DST structure when you are selling an investment property and need a fast, reliable “replacement property” to complete a 1031 tax-deferred exchange.

Key Action: Accept the trade-off: you get passive income and tax deferral, but you have almost zero control over the property (the trust manager makes all the decisions).

Takeaway: A DST allows you to trade a single, active property for a fractional, passive interest in a larger, professionally managed portfolio, all while keeping the tax man at bay. It’s like owning a piece of a skyscraper without having to fix a single leaky faucet.

Important DST Details:

The IRS has a specific set of rules (called the “Seven Deadly Sins”) that the trust cannot violate. For example, the DST generally cannot renegotiate leases, make significant capital expenditures, or refinance the debt. This inflexibility is the price you pay for the 1031 exchange benefits.

Flexibility Note: The ability to pool capital with many others (up to 499 investors) means you can access properties you couldn’t afford on your own.

5: The FLP – The ‘Family Fortress’ Asset Protector

A Family Limited Partnership (FLP) is less of a tax-deferral gimmick and more of a legal structure designed for generational control and asset protection. It’s a way for a family to pool a business, real estate, or other investments into one central pot, keeping all the decision-making power with the senior generation while allowing younger family members to own equity.

An FLP is set up with two types of partners:

General Partner (GP): Usually the parents or the senior generation. They retain 100% of the control over the assets and the operations.
Limited Partners (LP): Usually the children or trusts for their benefit. They own the economic value of the partnership (the percentage of the cash flow and appreciation) but have no control over the day-to-day decisions.

Scenario: The Control Transfer

You own a portfolio of rental properties worth $15 million that you want to pass to your three kids, but you are worried they might fight over who gets which building or sell them all immediately.

Step 1: Form the FLP

You transfer the $15 million in properties into the newly created Family Limited Partnership.

Step 2: Distribute Interests

You retain a small General Partner stake (e.g., 2%) and 98% of the value is held as Limited Partner stakes. Over time, you “gift” Limited Partner interests to your kids.

Step 3: The Valuation Discount

Because the Limited Partner interests have no control and are difficult to sell (who wants a piece of a partnership they can’t control?), the IRS allows you to gift them at a discount to their actual proportional value. This means you can transfer more wealth without using up your gift tax exemption.

Key Action: Use the FLP to consolidate multiple family assets (businesses, farms, land) under one management structure, usually controlled by the senior generation.

Key Action: Gift the non-controlling Limited Partner interests to younger family members over time, capitalizing on valuation discounts to transfer wealth tax-efficiently.

Takeaway: The FLP is a supreme tool for asset protection – it’s extremely difficult for a Limited Partner’s creditor or ex-spouse to successfully seize the underlying assets, as they can only go after the LP’s interest in the partnership, not the property itself.

Why It’s Better Than a Direct Gift:

If you just gave the kids the rental properties outright, they could sell them tomorrow, or a lawsuit against one child could directly endanger the properties. With an FLP, you keep management control, the assets are shielded from creditors of the Limited Partners, and you get a tax break on the transfer.

Generational Wealth: This structure is perfect for managing complex, sentimental assets like a family farm or a business that needs decades of continuity.

Conclusion: The Ultimate Tax-Strategy Cheat Sheet

The super-rich aren’t just hoarding cash; they’re strategically deploying these legal structures to grow their assets while minimizing the tax erosion that hits everyone else. Think of them as specialized tools:

GRAT: The high-stakes, short-term bet on massive asset growth (for family).
IDGT: The long-term estate freezer that accelerates tax-free growth (for family).
CRAT: The income machine that uses charity for big upfront tax deductions (for charity/income).
DST: The ultimate stress-free, passive 1031 tax deferral hack (for passive real estate investors).
FLP: The family fortress that centralizes control, protects assets, and transfers wealth at a discount (for family control and protection).

Choosing the right structure is the first step. Executing it perfectly, however, requires a specialized team that knows exactly which buttons to push to maximize the benefit and stay compliant. Don’t try to do this with an online template – it’s almost always guaranteed to fail.

Look, the game of wealth is about playing smart, not just playing hard. You now know the five tools the top 1% use to keep their cash flowing to the next generation instead of the tax office.

Which of these five structures sounds like the immediate game-changer your family needs right now?

Stop guessing and start strategizing. If you’ve got the assets, you need the right structure. We’re happy to point you to the experts in our network who can offer this strategic work.

Thanks for reading,
Sid Peddinti, Esq.
BA, BIA, LB/JD, LLM

Schedule a pro bono strategy session with us. We’ll help you find the right set of experts to help you navigate these complex laws with more confidence.

This article is for informational and educational purposes only and does not constitute financial, legal, or tax advice. The rules and regulations surrounding trusts (GRAT, CRAT, IDGT, DST) and partnerships (FLP) are highly complex and constantly subject to change by the IRS and state laws.

Any tax savings or asset protection benefits described are potential benefits and depend entirely on individual circumstances, asset performance, and professional execution. You must consult with a qualified estate planning attorney and tax professional before implementing any of these strategies.