A wealthy taxpayer wants to freeze the value of their estate. They transfer $5 million of assets to a Grantor Retained Annuity Trust (GRAT) with a 2-year term. The annuity payout is set such that the present value of the annuity equals $5 million (Zeroed-out GRAT). If the assets in the trust grow at 10% annually and the Section 7520 hurdle rate is 4%, what is the gift tax consequence at inception and the estate tax consequence if they survive the term?

1. Analyze GRAT Structure: 'Zeroed-out' means Retained Annuity PV = Asset Value. Gift = Asset - Retained = 0.<br/>2. Growth vs Hurdle: Growth (10%) > Hurdle (4%). Excess growth passes to remainder beneficiaries.<br/>3. Survival: If grantor survives the term, the assets (including appreciation) are out of the estate. The annuity payments came back to grantor (and are in estate if not spent), but the excess growth is transferred tax-free.<br/>4. Result: Gift is approx $0. Estate benefit is removal of appreciation.