When interest rates rise, most people instinctively brace for impact. You’re anticipating higher mortgage costs, slower markets, and tougher borrowing. But there’s a silver lining for families planning to intentionally and tax-efficiently transfer their wealth.
Estate planning in a high interest rate environment actually opens up some powerful strategies that you can leverage. These tools might not be household names, but they’re worth taking the time to understand.
In this post, you’ll learn about three lesser-known but highly effective estate planning strategies that become even more valuable in a high interest rate environment:
- The Qualified Personal Residence Trust (QPRT)
- The Charitable Remainder Annuity Trust (CRAT)
- The Grantor Retained Income Trust (GRIT)
Getting started with estate planning in high interest rate environments
Can higher interest rates actually help with estate planning?
- Surprisingly, yes. In fact, some strategies become more tax-efficient as rates rise.
What estate planning tools work best in today’s high-rate environment?
- QPRT – Transfer your home to your heirs while you still live there (and reduce estate taxes in the process).
- CRAT – Turn appreciated assets into income for yourself and a future gift to charity.
- GRIT – Gift assets to someone outside your immediate family while keeping income for a set time.
Why do these work better when interest rates are high?
- Because the IRS values retained income streams more when rates rise, which then shrinks the taxable value of the gift.
Why Interest Rates Matter in Estate Planning
The reason these strategies work is because of something called the IRS Section 7520 rate. It’s an interest rate set by the IRS every month, and it’s used to calculate the present value (today’s value) of future payments.
Here’s what happens during times of high interest rates:
- When rates go up, the IRS assumes any income stream you keep is worth more today.
- That means the value of the gift you’re giving away is worth less.
- This means you may owe less in gift or estate tax, all while moving assets out of your estate.
This dynamic is what makes certain strategies more attractive during moments of higher interest rates. Each of the three strategies we share in this post has the potential to be leveraged for your benefit when they’re used strategically during estate planning.
1. Qualified Personal Residence Trust (QPRT)
Imagine you could gift your home to your children while continuing to live there, rent-free, for the next 10 or 15 years. The IRS values your right to live there based on current interest rates. When those rates are high, the taxable value of the gift is lower than it would be in a low-rate environment.
How It Works:
- You transfer your home (primary or vacation) into a trust.
- You retain the right to live there for a set number of years.
- After that period, the home passes to your heirs – outside your taxable estate.
Why It Works Now:
Higher rates mean there is a higher assumed value on your right to live in the house. That makes the remainder gift (what your heirs get) look smaller. This way, you’re using up less of your lifetime exemption.
Pros:
- Moves the home (and future appreciation) out of your estate.
- Reduces gift tax exposure.
- Allows you to keep living on the property.
Risks:
- If you pass away during the trust term, the home comes back into your estate.
- After the term ends, you must pay fair market rent to stay, although that rent can further reduce your estate.
- You need to be confident in your health and your long-term housing plans.
When It Fits:
You’re in good health, have a valuable residence, and want to transfer it thoughtfully to your family without triggering a massive tax bill.
2. Charitable Remainder Annuity Trust (CRAT)
This one’s a beautiful blend of income, giving, and tax savings. You contribute an appreciated asset to the trust, get a steady income stream, and at the end of the term (or at your passing) the remainder goes to a charity of your choice.
How It Works:
- You contribute appreciated assets to the CRAT.
- You receive a fixed annual income stream.
- After a set term (or at death), the remainder goes to a charity of your choice.
Why It Works Now:
When interest rates rise, the IRS assumes the charity’s remainder share is worth more. That increases the upfront charitable deduction you get now.
Plus, the trust can sell appreciated assets without triggering immediate capital gains. This gives you the benefits of liquidity and tax efficiency.
Pros:
- Creates reliable income.
- Unlocks an immediate charitable deduction.
- Defer capital gains tax.
- Make a meaningful impact on a cause you care about.
Risks:
- Fixed payments don’t adjust for inflation.
- If returns are low, the charity’s gift may shrink.
- Terms are locked in once the trust is established.
When It Fits:
You have highly appreciated assets, value steady income, and want to support a charitable mission while optimizing your taxes.
3. Grantor Retained Income Trust (GRIT)
If you want to pass assets to someone outside your immediate family, such as an unmarried partner or a close friend, this little-known strategy is one way to go about it.
How It Works:
- You transfer assets into the GRIT.
- You retain the income for a set period.
- After the term ends, the assets go to the non-family beneficiary.
Why It Works Now:
Again, higher interest rates boost the assumed value of your retained income stream. That discounts the value of what you’re gifting, leading to a lower taxable gift amount.
Pros:
- Smart way to transfer wealth to a non-family member.
- Retain income during the term.
- Reduce estate and gift tax exposure.
Risks:
- Only works when the recipient isn’t an immediate family member.
- If you pass away during the term, the assets revert back to your estate.
- Trust income is taxable to you as the grantor.
When It Fits:
You’re planning for an unmarried partner, a close friend, or a relative who doesn’t qualify as “immediate family” under IRS rules, and you want to make that gift tax-efficiently.
Which Strategy Is Right for You?
It all comes down to your goals. Every estate plan is personal, and these strategies aren’t one-size-fits-all. But if you’re sitting on real estate, appreciated investments, or a desire to leave a meaningful legacy, one of these tools might be exactly what you need.
- Want to pass on your home, keep living there, and lower your tax bill? QPRT.
- Need income, want to give back, and have appreciated assets? CRAT.
- Planning for someone outside the traditional family structure? GRIT.
Final Thoughts
We know that rising interest rates aren’t usually something people celebrate. But in the right estate planning context, they can work in your favor.
These strategies help reduce the tax burden, clarify your intentions, and create lasting value for the people and causes you care about.
At SK Wealth, we help clients translate their values into action with smart, integrated advice that connects estate, tax, investment, and everyday financial decisions. Through our Integrated Financial Advantage™ process, we work with your full team of advisors to keep your legacy intentional, tax-efficient, and aligned with the future you want.
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