How Do High Interest Rates Impact Estate Planning?
When the 7520 rate remains low—as it was for 15 years—estate planning opportunities flourish. However, few planners have recently faced the opposite scenario until now.
The Section 7520 rate, an IRS-determined interest rate revised monthly, serves a critical function in estate planning. It represents 120 percent of the applicable federal midterm rate (compounded annually) for the valuation month, rounded to the nearest two-tenths of a percent. This rate calculates the present value of annuities, life estates, and remainders for actuarial planning purposes.
The rate’s dramatic shift illustrates the recent economic shift: January 2022 saw the rate at 1.6%, but by December 2022 it had climbed to 5.2%—an unprecedented 225% increase in the rate’s history. This volatility creates both challenges and opportunities for strategic planning.
Key Planning Strategies in a High-Rate Environment
Higher Inflation Means Increased Exemptions
Inflation adjustments benefited taxpayers on January 1, 2023. The federal transfer tax exemption rose $860,000 to $12.92 million, while the annual gift tax exclusion increased from $16,000 to $17,000. Wealthy families can leverage these increases to transfer assets gift-tax-free. Those who previously exhausted exemptions should evaluate additional gifting opportunities.
Shift Charitable Strategies to Charitable Remainder Trusts
Charitable Lead Trusts previously dominated in low-rate environments, but higher rates favor Charitable Remainder Trusts instead. Since both trust types calculate income and remainder interests using the 7520 rate, rising rates enhance the charitable deduction benefits in CRTs, making them more attractive vehicles.
Revive Qualified Personal Residence Trusts
QPRTs represent dormant strategies finally warranting reconsideration. These trusts allow homeowners to transfer residences at discounted values while retaining occupancy rights for specified years. The 7520 rate determines the owner’s retained interest value—higher rates mean greater retained value and smaller taxable gifts to remainder beneficiaries, typically children.
Grantor Remainder Trusts Retain Relevance
GRATs remain viable despite higher rates. Their success depends on whether transferred assets appreciate beyond the 7520 rate, with excess appreciation passing gift-tax-free to remainder beneficiaries. Zeroed-out GRATs prove particularly useful for individuals owning high-growth potential assets, requiring no exemption usage while positioning assets for appreciation.
These strategies collectively demonstrate that higher interest rates create renewed planning opportunities previously unavailable in the low-rate environment.
If you or a loved one needs assistance with elder law, probate or estate planning issues, do not hesitate to book a call with us today. We are here to help.
