Consider a CRAT when Interest Rates Are High
When it comes to wealth transfer techniques, many are sensitive to interest rate movements and may perform better or worse, depending on prevailing interest rates. While today’s interest rates may seem relatively high, we had experienced a lengthy period of low interest rates until March 2022, at which time the U.S. economy began recovering from the COVID-19 pandemic and inflationary pressures mounted. Prior to this interest rate surge, the previous extended run of low rates enabled a significant amount of wealth to be created and transferred using techniques such as Grantor Retained Annuity Trusts (GRAT), sale transactions with grantor trusts, inter-family loans and charitable lead trusts.
For these techniques and others, the Treasury publishes interest rates (called Section 7520 rates) every month to be used in various estate planning techniques. The IRS states that the 7520 interest rate for a given month is “the rate that is 120 percent of the applicable federal midterm rate (compounded annually) for the month in which the valuation date falls. That rate is then rounded to the nearest two-tenths of one percent.”1
Since 2000, the 7520 rate has ranged from a high of 8.2% in February 2000, to a low of 0.4% from August to November 2020.2 The current 7520 rate is 5.0% (as at April 2025), down slightly from 5.2% at the beginning of the year.3
These days, the potential exists for inflation (and interest rates) to rise again, given geopolitical and macroeconomic factors like the global tariff/trade war. Here are a few wealth transfer techniques that we believe work better when interest rates are high, along with one that should still be considered even in an environment of higher interest rates.
Charitable Remainder Annuity Trusts (CRATs)
A CRAT is a strategy to transfer assets to charity after the donor has received a lifetime (or term of years) annuity from the transferred assets. The 7520 rate is used to calculate the present value of the annuity retained by the donor. As with any present value calculation, the higher the 7520 rate, the lower the annuity value. When the annuity value is subtracted from the value of the transferred assets, a larger charitable deduction is realized.
When the 7520 rates were sitting at 1.0%, an individual younger than age 75 couldn’t even do a lifetime CRAT, given that a CRAT requires the following three conditions to be met:
- A minimum annuity payment of 5% of the assets transferred,
- A charitable deduction of at least 10% of the assets transferred, and
- Less than 5% probability that the CRAT asset will be exhausted.
An interest rate of 1.0% produced such a larger present value for the annuity that you couldn’t pass these tests. With today’s 5.0% 7520 rate, an individual age 25 can do a lifetime CRAT. Moreover, with a higher interest rate discounting the annuity, a donor may elect to take a larger annuity payment and still meet these CRAT requirements. For example, a person age 75 could reserve an annuity of $75,970 with today’s 7520 rate, whereas the annuity would have been $50,863 when the 7520 rate was 1.0%. This gives the donor an annuity that’s almost 50% higher with the same charitable deduction.
CRATs are tools used to defer income taxes on the sale of appreciated assets. Since CRATs are tax-exempt trusts, the transferred assets can be liquidated without any income tax. As the donor receives the annuity, each payment carries out taxes from the trust. As a result, the donor has the full value of the transferred property in the CRAT upon which to draw an annuity.
Qualified Personal Residence Trust (QPRT)
A QPRT is a split-interest trust that also uses the subtraction method to determine the value of a gift. Specifically, the grantor transfers a residence into a trust and retains the right to utilize the residence for a term of years. After the term, the residence passes to the grantor’s beneficiary gift tax-free. The 7520 rate is used to calculate the value of the grantor’s retained right to use the residence, so the larger the 7520 rate, the larger the retained value. As a result, the calculated value of what passes to the grantor’s beneficiary, or the gift amount, is lower.
For example, a grantor age 60 who establishes a QPRT with a $1 million residence and retains possession for 20 years would make a gift of $218,660 at today’s 5.0% 7520 rate. Establishing a similar QPRT when the 7520 rate was only 1.0% resulted in a gift of $475,470, requiring more than twice the amount of the gift and estate tax exemption.
QPRTs are likely to become more popular in an environment of higher interest rates and with the increased wealth held within residences as real estate values rise. We believe this is a fairly straightforward strategy and one that you pretty much forget about until the term of years ends, you sell the property or make improvements to the property. However, keep in mind that you need to survive the retained term of possession, or else the residence is back in your estate. In addition, there is a claw back of the estate exemption used to shelter the gift.4
Gifts of the inflation-adjusted exemption
As a result of rising inflation, people have an opportunity to give more away because the estate and gift exemption amount is inflation adjusted and will increase as inflation moves higher. Consider that in 2020, the year when the pandemic started, the estate and gift exemption was only $11.58 million. As of 2025, the estate and gift exemption is $13.99 million for individuals and $27.98 million for couples.5
This exemption also applies to the generation-skipping transfer tax exemption (e.g., if you gift money and/or property to grandchildren instead of your children). So, gifts into generation-skipping trusts will remove assets from your estate for estate tax purposes, but more importantly, the assets and the appreciation of these assets in the trust are not taxed in future generations. Accordingly, for those who have significant estates, utilizing the inflation adjustment to their estate, gift and generation-skipping tax exemptions may save a significant amount of future taxes.
Stay with what’s worked
Although we’d prefer an environment of low interest rates for wealth transfer purposes, we have some techniques available that actually benefit from higher interest rates. In our view, higher interest rates should not mean abandoning the techniques that moved significant wealth when rates were at historical lows. Higher interest rates simply mean that those techniques will transfer less wealth than before. So, a GRAT, a sale transaction or inter-family loans will simply require the grantor to receive more money in return, as the result of a higher interest rate. Another way to think about it is these techniques are often referred to as estate “freezing” techniques, meaning that the grantor freezes the growth of their estate at a stated interest rate. Today, this “freeze” is at a higher rate compared to a few years ago, but not prohibitive by any stretch. Reach out to your Corient Wealth Advisor to see if a CRAT or other wealth transfer strategies are appropriate for your circumstances and objectives.
1 https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates-for-prior-years#2024
2 https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates-for-prior-years#2024
3 https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates
4 https://corient.com/insights/articles/potential-estate-gifting-clawback
5 https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
ABOUT THE AUTHOR
John Schuman, JD, CFP®
John is a Partner, Head of Wealth Transfer at Corient, based in our Columbus, OH, office. Previously, he was a Partner, Co-CEO and President of legacy firm Budros, Ruhlin & Roe. As a CERTIFIED FINANCIAL PLANNER™ certificant, licensed attorney and former Certified Public Accountant (CPA), he adds an exceptional perspective to the firm. John’s expertise includes estate planning and taxation, income tax, general business and succession planning, and charitable and retirement planning. He has been a featured speaker at conferences of the Columbus Bar Association, the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), the Ohio CLE Institute, The Columbus Foundation and the International Association of Advisors in Philanthropy.
John holds a Bachelor of Science from The Ohio State University and a Juris Doctorate from Capital University Law School (summa cum laude). John is a member of the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), and the Columbus, State of Ohio and American Bar Associations. He also serves as a member of the Professional Council of The Columbus Foundation.
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