Estate Planning Strategies When Interest Rates Are Higher

For most people, an estate plan’s primary goal is to help ensure assets are allocated to the intended beneficiaries in a fair and efficient manner and in a way that lessens their emotional burden.

For many, there’s also the goal of reducing taxes. When this is the case, interest rates can play an important role. Therefore, it’s important to have a general understanding of how interest rates may impact common estate planning strategies, including which are typically most effective in an environment of low interest rates and which are usually best when interest rates are higher.

Each month, the Internal Revenue Service publishes two important interest rates:

  • Applicable Federal Rates (AFRs) are the minimum interest rates charged for loans between related parties to avoid a gift tax.
  • Section 7520 rate is used to calculate annual payments that must be made to beneficial parties when utilizing various techniques for financial products like annuities.

These rates are calculated based on the yields of government debt instruments and the target federal funds rate and are often used when implementing certain estate planning techniques. Here’s a look at some of those techniques.

Low interest rate environment

Estate planning in a low interest rate environment typically includes implementing strategies that transfer wealth to family members with little or no gift tax being owed. These strategies often involve senior family members lending younger family members money, selling them assets or creating a trust. Such techniques provide a predetermined income stream and usually anticipate that the assets will be invested in ways that can earn a higher rate of return than the applicable prevailing interest rate.

When implemented properly, this technique allows the senior family member to “freeze” the value of the assets and pass along the future appreciation in value to junior family members (outright or in a trust) for their benefit. Examples of techniques that benefit from a low interest rate environment include intrafamily loans, Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts. The use of Charitable Lead Trusts is a technique that benefits those who are charitably inclined.

High interest rate environment

Estate planning in a high interest rate environment can entail reducing the actuarial value of a future gift that would otherwise be taxable. The higher the prevailing rate, the more beneficial these strategies will be. Qualified Personal Residence Trusts (QPRTs) and Charitable Remainder Trusts (CRTs) are two common techniques that we’ll consider in turn.

Qualified Personal Resident Trust

With a QPRT, a trust is formed to own a personal or vacation residence with the goal of transferring the residence to the trust beneficiaries when the trust term expires. During the trust term, the grantor may occupy the home as they would otherwise. At the end of the term, they can either relinquish use of the home or rent it back. Since the initial transfer is a taxable gift of the remainder interest, the higher the interest rate, the higher the value of the retained right to utilize the property during the term of the trust, and the lower the value of the gift.

Charitable Remainder Trust

For those who are charitably inclined, when a CRT is formed, a non-charitable beneficiary (typically the grantor or grantor’s spouse) receives a predetermined annual payment from the trust. These payments can be for their lifetime, for a term of up to 20 years or for the shorter or longer of the two options. A charitable organization then receives the remainder of the trust value at the end of the specified term. The annual payment received is typically a percentage of the trust value, which must be at least 5% and not more than 50%. Moreover, the value going to charity must be at least 10% of the trust’s initial value. In an environment of higher interest rates, it’s easier for the trust to pass the strict IRS guidelines while, at the same time, providing the grantor with a higher charitable income and gift tax deduction.

With interest rates currently higher and some uncertainty as to when they might come back down, the implementation of any interest-rate-sensitive estate planning technique requires guidance from a qualified estate planning expert. Our team can assist you in better understanding the options available to you. We can also work closely with you and your estate planning attorney to help implement the strategies that align best with your personal and family goals.


John Smith, CFP, AEP

John Smith, CFP, AEP

Partner, Wealth Advisor

John is a Partner, Wealth Advisor at our Itasca, IL, office. John is adept at helping business owners integrate their unique business opportunities and risks into their personal wealth management plans. He finds that business owners, in particular, are often so focused on making sure their business operations are running smoothly that they may overlook their personal financial well-being. John holds the Accredited Estate Planner® designation.


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