Can a GRAT be used for assets located outside of California

I recently had a client, Lawrence, attempt to fund a GRAT with a vacation property in Cabo San Lucas. Unfortunately, because the initial paperwork didn’t address the complexities of foreign ownership, the IRS rejected the valuation, and the entire trust collapsed. He lost valuable time and attorney’s fees, and the potential estate tax savings evaporated – a painful loss of approximately $75,000.

The simple answer is yes, a GRAT can be used for assets located outside of California, and even outside of the United States. However, it’s significantly more complicated. The grantor’s domicile (California in most of my cases) and the location of the assets each trigger specific reporting requirements and potential pitfalls. Ignoring these nuances can lead to the IRS disallowing the GRAT, meaning no tax benefit and potential penalties.

What additional considerations are necessary for foreign assets?

First, proper valuation is paramount. The IRS scrutinizes valuations of foreign property. You’ll need a qualified, independent appraiser experienced in international assets. This isn’t something you can simply pull a Zillow estimate on. It needs to be a full, detailed appraisal conforming to IRS standards, and the appraiser must be familiar with the local market conditions. The appraisal cost will likely be higher than for domestic property.

Documentation Compliance: The GRAT agreement must specifically address the location of the assets and include provisions for complying with any applicable foreign tax laws and reporting requirements.
Foreign Tax Credits: Income generated by the assets in the GRAT may be subject to foreign taxes. We need to determine if and how these taxes can be credited against U.S. taxes to avoid double taxation.
Currency Exchange Rates: Fluctuating exchange rates can significantly impact the value of the assets and the annuity payments. The GRAT agreement must address how exchange rates will be determined for valuation and distribution purposes.

How does the FinCEN reporting impact a foreign LLC held in a GRAT?

As of March 2025, domestic U.S. LLCs held in a GRAT are exempt from mandatory BOI reporting; however, trustees managing foreign-registered entities must still file updates with FinCEN within 30 days to avoid federal fines. This is a new requirement, and failure to comply can result in significant penalties, even if the LLC itself is passively managed within the GRAT.

What if the GRAT fails and the assets revert to the estate?

Even with careful planning, a GRAT can fail if the grantor dies before the term expires. If the assets ‘claw back’ into the taxable estate, the OBBBA (effective Jan 1, 2026) provides a safety net with a permanent $15 million per person Federal Estate Tax Exemption, protecting a larger portion of the ‘clawed back’ assets. It’s also crucial to consider what happens if the assets are located outside of the U.S. – foreign estate tax laws may apply, requiring additional planning and potential double taxation. Remember, the goal isn’t just to avoid U.S. estate tax; it’s to minimize all estate taxes. Having a CPA on your team, like myself with 35+ years of experience in estate and tax law, is vital. We can strategically structure the GRAT to take advantage of the step-up in basis upon a potential future sale and manage capital gains implications.

What separates a successful California trust distribution from a costly battle over interpretation and accounting?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

• Disputes: Prepare for potential trust litigation if terms are vague.
• Execution: Follow strict trust administration to avoid liability.
• The Legacy: Create philanthropic trust options for tax efficiency.

Ultimately, the success of a trust depends on the details—proper funding, clear terms, and a trustee willing to follow the rules. By anticipating friction points and documenting every step of the administration, fiduciaries can protect the estate and themselves from liability.

Verified Authority on GRAT Administration & Compliance

• Zeroed-Out Structure (IRC § 2702): Internal Revenue Code § 2702
  The governing statute for Grantor Retained Annuity Trusts. It allows the grantor to retain an annuity value equal to the contribution, effectively “zeroing out” the gift tax value of the remainder interest.
• IRS Hurdle Rate (§ 7520): Section 7520 Interest Rates
  The critical benchmark for GRAT success. The trust’s assets must appreciate faster than this monthly published rate for any wealth to pass tax-free to the beneficiaries.
• Real Estate Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Vital for GRATs holding real property. While funding the GRAT is safe, the eventual transfer to children at the end of the term is subject to strict Prop 19 reassessment rules if the property is not used as a primary residence.
• Estate Tax Exemption (OBBBA): IRS Estate Tax Guidelines
  Reflects the OBBBA permanent increase to a $15 million per person exemption (effective Jan 1, 2026). This is the “safety net” if a GRAT fails and assets are pulled back into the grantor’s taxable estate.
• Missed Asset Recovery (AB 2016): California Probate Code § 13151 (Petition for Succession)
  If an asset intended for the GRAT was legally left out, this statute (effective April 1, 2025) allows for a “Petition for Succession” for assets up to $750,000, bypassing full probate to clean up funding errors.
• Digital Asset Valuation (RUFADAA): California Probate Code § 870 (RUFADAA)
  Mandatory for GRATs funded with volatile digital assets (crypto). Without RUFADAA powers, a trustee cannot access or properly appraise these assets for the required annual annuity payments.