Let’s face it: rising interest rates aren’t just impacting mortgage payments and credit card balances. They’re quietly reshaping how we think about long-term wealth transfer. In 2025, with the Federal Reserve’s benchmark rate holding between 5.25% and 5.5%, many traditional estate planning strategies are being tested, recalculated, and in some cases, shelved in favor of smarter alternatives.
If you’re someone who has built up a real estate portfolio, owns a family business, or simply wants to pass on wealth in the most tax-efficient way possible, this shift matters. Higher interest rates impact everything from how we structure trusts to how we value gifts, and that means now is the time to take a closer look at your estate plan.
How Interest Rates Affect Estate Planning Tools
The IRS uses interest rate benchmarks, specifically the Applicable Federal Rates (AFRs) and the Section 7520 rate, to determine the value of many estate planning techniques. When those rates rise, the math behind strategies like Grantor Retained Annuity Trusts (GRATs) or Charitable Lead Trusts (CLTs) changes, sometimes significantly.
For instance, a higher Section 7520 rate can decrease the present value of a future income stream, which may reduce the tax efficiency of some wealth transfer strategies. But that’s not always a bad thing. In fact, a high-rate environment can actually make certain tools, like Charitable Remainder Trusts or Qualified Personal Residence Trusts (QPRTs), more favorable.
Tools That Benefit from Higher Rates
Some estate planning strategies are designed to perform better when interest rates are up. Here are a few that stand out in 2025:
- Charitable Remainder Annuity Trusts (CRATs): These vehicles become more appealing in high-rate environments because the IRS allows a larger charitable deduction, improving their tax efficiency.
- Qualified Personal Residence Trusts (QPRTs): When you transfer your home into a QPRT, the value of the taxable gift is based on the retained interest, which shrinks as interest rates rise. That means less is counted as a taxable gift to your heirs.
- Spousal Lifetime Access Trusts (SLATs): While not strictly interest-rate dependent, these trusts are increasingly being used in 2025 to lock in today’s historically high lifetime estate and gift tax exemptions before they potentially revert in 2026.
These are not just smart financial tools — they’re timing-sensitive opportunities.
Strategies That May Lose Efficiency in High-Rate Environments
Not every strategy thrives when rates go up. Here’s where caution is warranted:
- Grantor Retained Annuity Trusts (GRATs): Traditionally a go-to strategy in low-rate environments, GRATs become less effective when their internal “hurdle rate”—the minimum return the trust must achieve to pass tax-free gains—is higher.
- Intrafamily Loans: These are still viable, but the increased AFRs mean you’ll have to charge higher interest rates to stay compliant with IRS rules, reducing their overall appeal for simple wealth shifts.
- Charitable Lead Trusts (CLTs): These lose some efficiency when the IRS assumes a higher growth rate on donated assets, reducing the upfront charitable deduction.
The point here is not to abandon these tools entirely, but to use them more selectively and under the right conditions.
What You Can Do Now: Timing Matters
If you haven’t reviewed your estate plan recently, now’s the time. There are a few reasons 2025 is a critical year:
- Exemptions are historically high. The federal estate tax exemption is $13.99 million per person. But that number is expected to fall by half when the current tax law sunsets at the end of 2025.
- Interest rates are high—at least for now. That creates a window where tools like QPRTs and CRATs may be especially attractive.
- Wealth transfer strategies take time. Setting up a trust or funding a transfer doesn’t happen overnight. The earlier you plan, the more you can do.
The bottom line? Rising rates aren’t just an economic inconvenience — they’re a planning signal. With the right structure in place, you can use them to your advantage.
Conclusion
Interest rates may seem like a technical side note in the broader economic story, but for estate planning, they’re center stage in 2025. If you want to protect what you’ve built and make the most of current tax law, it pays to act now.
Whether you’re thinking about a residence transfer, charitable giving, or setting up a trust for your kids or grandkids, the numbers are changing — and your strategy should too.
Want to know which estate tools make the most sense in a high-rate environment? Email Terry@DuPontAdvisory.com, call (800) 234-4452, or schedule a discovery call to start a conversation.
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