Rising interest rates aren’t just a concern for borrowers and homebuyers. They’re changing the game for estate planners, too. In 2025, the IRS Section 7520 rate is expected to remain steady around 5%, the highest it has been in years. That one number may seem obscure, but it has real consequences for families trying to pass on wealth efficiently.
Grantor Retained Annuity Trusts (GRATs) and intrafamily loans are two common strategies that hinge on interest rate assumptions. A GRAT lets you transfer the growth of an asset to your heirs with minimal gift tax—but only if that growth exceeds a benchmark rate set by the IRS (the 7520 rate). Intrafamily loans, meanwhile, involve lending money to family members or trusts at interest rates approved by the IRS. When those rates are low, the borrower can invest the funds and keep the gains. But when rates are high, the gap between loan cost and investment return narrows, reducing the effectiveness of the strategy.
Fortunately, this shift doesn’t mean the end of strategic estate planning. It simply requires a smarter, updated approach. In this article, we’ll explore which strategies have lost ground in today’s high-rate environment, where new opportunities lie, and what you can do to protect your legacy now.
Why Higher Rates Change the Math
The Section 7520 rate, published monthly by the IRS, is used to calculate the present value of future payments in various types of trusts. As of June 2025, it sits at 5.0%. This figure matters because many estate planning tools are only effective if they outperform this benchmark.
“The interest rate acts as a hurdle,” explains Justin Miller, national director of wealth planning at Evercore, in a recent article for The Tax Adviser. “The higher the hurdle, the harder it is to clear.”
GRATs, for example, are built on the idea that any appreciation in trust assets beyond the 7520 rate passes to heirs free of estate and gift tax. When rates were closer to 1%, even modest investment returns made these trusts effective. But at 5%, the math is far less favorable.
Similarly, Charitable Lead Trusts (CLTs) are impacted. Higher rates mean a greater share of the trust’s value is credited to the charity up front, reducing what’s left for heirs later. For families using intrafamily loans or installment sales, the IRS-required interest rate has increased, narrowing the potential tax arbitrage.
Strategies Losing Traction in 2025
1. GRATs: The higher the 7520 rate, the more difficult it is for GRATs to generate tax-free transfers. This is particularly true for zeroed-out GRATs, where the donor aims to pass all growth above the hurdle rate without any taxable gift. As rates rise, so must the trust’s performance to make the strategy work.
2. Intrafamily Loans: These remain useful in principle but less attractive in practice. The long-term Applicable Federal Rate (AFR), which governs interest on these loans, has climbed in tandem with broader economic trends. In 2025, families can no longer rely on low-rate arbitrage to quietly transfer wealth across generations.
3. Charitable Lead Trusts: According to Wilmington Trust, high interest rates reduce the remainder interest that eventually passes to heirs. That makes CLTs less compelling for families who are focused on charitable giving and wealth transfer.
What Works Better in a High-Rate Environment
Not all news is bad. Some estate planning tools actually become more effective when rates rise.
Qualified Personal Residence Trusts (QPRTs): These allow individuals to transfer a home at a discounted value for gift tax purposes. High rates increase the IRS’s assumed value of the retained interest (the time the owner continues to live in the home), reducing the taxable gift.
Charitable Remainder Annuity Trusts (CRATs): With higher rates, donors can claim larger charitable deductions for gifts made to CRATs. These trusts provide income to the donor (or another beneficiary) for life or a set period, then transfer the remainder to charity. As Miller notes, “Higher 7520 rates make it easier to satisfy the technical requirements that make CRATs viable.”
Estate Freeze Strategies: While some freeze techniques like GRATs struggle in this climate, others, such as sales to intentionally defective grantor trusts (IDGTs)—can still be effective with proper structuring. The key is careful modeling of interest obligations versus expected asset appreciation.
Tactical Moves You Can Make Now
The best estate planning strategies in 2025 start with reevaluation. With old assumptions no longer holding, families need to update their thinking and get proactive.
Rethink What Works: If your plan includes GRATs or CLTs, revisit the math. Run updated projections using current rates. In some cases, shortening the trust term or increasing annuity payouts may help.
Explore Alternatives: Consider QPRTs or CRATs if you’re holding a highly appreciated residence or planning a charitable legacy. These tools may now deliver more value.
Lock in Lower Rates When Possible: Section 7520 and AFR rates are published monthly. If you spot a dip, that’s your window to act.
Coordinate Across Advisors: Tax, legal, and investment planning need to align in this environment. An estate freeze or trust that appears to work on paper can still falter without proper asset allocation or loan terms.
Plan Around 2026: The lifetime estate tax exemption is scheduled to drop in 2026. Consider using today’s high exemption and restructured trusts to lock in wealth transfer before that happens.
Conclusion
Higher interest rates don’t mean the end of tax-efficient estate planning—but they do require a shift in strategy. Many traditional tools, like GRATs and low-interest family loans, now offer diminished returns. Meanwhile, others like QPRTs and CRATs are stepping into the spotlight. The key is staying informed and nimble.
At Bascom Law, we help families design and adapt their estate plans to current conditions. If you're unsure whether your strategy still works in today’s economy, we're here to help.
To schedule a consultation, visit BascomLaw.com or call 770-285-5493.
To schedule a consultation, visit BascomLaw.com or call 770-285-5493.
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