Los Blancos have now become the joint-most successful team in the history of the competition alongside El Clasico rivals Barcelona.
The Champions League holders struggled to get going in the first period, but proved too strong in the second as Cristiano Ronaldo's low free kick made the difference on the night.
Arguably Real Madrid's strongest XI took to the field on Saturday evening, with Sergio Ramos, Dani Carvajal and Toni Kroos all returning to the team after missing the semi-final win over Al Jazira Club.
As for Copa Libertadores winners Gremio, rumoured Barcelona and Real Madrid target Arthur missed out through injury, but there was a spot in the team for Luan, who has previously been linked with a number of European clubs.
It took Real Madrid until the 18th minute to have their first sight of the Gremio goal, but Ronaldo's effort failed to test Marcelo Grohe between the sticks, before Carvajal had a strike blocked by Pedro Geromel.
Ronaldo found himself unmarked inside the Gremio box five minutes before the interval, but before he could shoot, centre-back Walter Kannemann was across to make a stunning last-ditch challenge.
Real Madrid's number seven then just missed the crossbar with a powerful free kick as the two teams headed down the tunnel at 0-0 after a half of football which was dominated by Zinedine Zidane's team.
Neither manager made a change at the interval, and the pattern of the match continued into the second period as Real Madrid dominated the ball in search of the first goal of the final.
Ronaldo again struck wide of the Gremio post in the 52nd minute, before Ramiro had a shout for a penalty down the other end as he fell under a challenge from Ramos.
Real Madrid finally made the breakthrough in the 53rd minute when Ronaldo's low free kick found a route into the bottom corner as he scored his seventh goal in the Club World Cup.
Ronaldo had the ball in the back of the net for a second time just before the hour, but it was correctly chalked off for offside, with Karim Benzema just straying in the build-up.
Casemiro then tested Grohe from distance as Real Madrid continued to look for the game's second goal.
Grohe made a smart save to push a Modric strike onto the post in the 65th minute, but the pressure was constant as Gremio struggled to keep hold of the ball.
Luan was the player making things happen for Gremio as the Brazilian side opened up in the final 20 minutes, while Everton came off the bench as the attacker looked to add to his semi-final goal against Pachuca.
Benzema passed up a decent chance to make it 2-0 15 minutes from time, and the Frenchman was replaced by Gareth Bale shortly after as the final headed for its final moments.
Grohe made two brilliant saves to deny Ronaldo and then Bale five minutes from time, but Gremio could not find an equaliser as Real Madrid became the first team in history to win back-to-back Club World Cups.
Real Madrid (4-3-3): Navas; Carvajal, Ramos, Varane, Marcelo; Casemiro, Modric, Kroos; Isco (Lucas 76'), Benzema (Bale 79'), Ronaldo
Gremio (4-5-1): Grohe; Edilson, Geromel, Kannemann, Cortez; Michel (Maicon 84'), Jailson, Ramiro (Everton 71'), Luan, Fernandinho; Barrios (Jael 63')