Estate Planning When Interest Rates Fall | Allworth Financial

When interest rates fall, certain estate-planning tools get turbocharged, others take a back seat, and a few need a tune-up rather than a trade-in. If you’re charitably inclined, own growthy assets, or you’ve made (or considered) loans to family or a trust, a lower-rate backdrop can be your moment. 

Why interest rates matter in estate planning 

Two IRS benchmarks quietly steer a lot of estate strategy: 

• The Section 7520 rate: used to value annuities, life estates, and remainders in many trusts. When this “hurdle rate” drops, it gets easier for certain strategies to work as intended. 

• The Applicable Federal Rates (AFRs): minimum interest rates for private (including intra-family) loans. AFRs come in short-, mid-, and long-term flavors and reset each month. Lower AFRs reduce the “drag” on strategies that rely on loans. 

As of September 2025, the IRS 7520 rate is 4.8% (per Rev. Rul. 2025-17). That’s a meaningful shift from the mid-5s earlier in the year. 

Strategies that shine when rates fall 

1) GRATs (Grantor Retained Annuity Trusts) 

A GRAT lets you put an asset into a trust and pull back an annuity over a set term. If the trust’s investments grow faster than the 7520 rate in effect when you set it up, that excess appreciation can pass to heirs with little or no gift tax. Lower 7520 = lower bar to clear. In a falling-rate world, this is often the first lever we pull for volatile or high-upside positions (public equities, pre-liquidity private shares, concentrated stock). 

A few practical notes: 

• Shorter, “rolling” GRATs can reduce the risk that a bad market year sinks the whole plan. 

• Avoid funding with low-growth assets; you want return above the hurdle for this to work. 

2) CLATs (Charitable Lead Annuity Trusts) 

If philanthropy is part of the plan, a CLAT pays a fixed amount to charity for a term, then whatever’s left goes to heirs. A lower 7520 rate increases the value of the charitable lead interest (and thus the potential deduction) and can reduce the taxable gift tied to the remainder. That makes CLATs relatively more attractive as rates fall. 

Design tips: 

• “Zeroed-out” CLATs aim to make the actuarial value of the charity’s stream equal the contribution so the gift to heirs is valued near zero on day one. Then you invest to outperform the hurdle so the remainder grows. 

3) Intra-family loans (and refinancing existing notes) 

AFR-based loans to family members or to a grantor trust (like an IDGT) create a simple arbitrage: if the borrowed funds earn more than the AFR, the growth accrues to the borrower (often outside your estate). When AFRs drop, the spread gets easier. If you already have a higher-rate note in place and your documents allow it, you may be able to refinance into today’s lower AFR, done properly, without triggering a gift. Paperwork and terms matter here; this isn’t “just tear it up and start over.” 

Bonus application: the installment sale to an IDGT. You sell appreciating assets to a grantor trust in exchange for a note set at the appropriate AFR. Lower AFRs mean a lower hurdle for the trust to outperform—moving more appreciation outside your estate.

Strategies that lose a bit of demand when rates fall 

• QPRTs (Qualified Personal Residence Trusts): Higher 7520 rates generally make QPRTs more efficient (they increase the value of your retained use, shrinking the taxable gift). So in a falling-rate period, QPRTs are often less compelling relative to other tools. They can still fit, but the math isn’t as favorable. 

• CRTs (Charitable Remainder Trusts): They’re wonderful for tax deferral and giving—but purely on deduction math, higher 7520 rates tend to boost CRT deductions, while lower rates dampen them a bit. If you’re choosing between CRTs and CLATs on rate-sensitivity alone, lower-rate environments tilt toward lead trusts. 

An important estate-tax update 

This year brought a significant change: the One Big Beautiful Bill Act passed both chambers and was signed in July 2025. Among other things, it eliminated the 2026 “sunset” and set the federal lifetime estate, gift, and GST tax exemptions to $15 million per person starting in 2026, indexed going forward. Translation: the exemption won’t fall in half at year-end 2025 under current law. That alters pacing, but not the value, of smart planning in a lower-rate world. 

What to do as rates drift down

1. Inventory your “growth” assets. GRATs and CLATs work best when there’s a reasonable chance of beating the hurdle rate over the trust term. Public stocks, diversified private funds, or a concentrated equity position you’d like to gradually move to heirs are prime candidates.
2. Run the numbers on an intra-family loan refresh. If you have a 2023–2024 note at a higher AFR, a properly structured replacement note at a lower AFR can free up cash flow for the borrower and increase the wealth-transfer spread. Your attorney will want to see the original note terms and security, then document the new arrangement to avoid an inadvertent gift. 
3. If charitably inclined, compare CLAT vs. CRT. Same philanthropic dollar, different timing and beneficiaries. In lower-rate regimes, CLATs often deliver stronger family-transfer math; CRTs may still be right for income smoothing, diversification, or illiquid-to-liquid transitions. 
4. Re-evaluate QPRTs. A QPRT can still make sense for non-financial reasons (like ensuring a home stays in the family), but purely on valuation math, they’re more rate-friendly when 7520 is higher. In a declining-rate environment, other tools may do more heavy lifting. 
5. Mind the calendar, but don’t let it drive the bus. With the exemption stabilized for 2026 and beyond (subject to future law changes, of course), you can be deliberate. Focus on strategy quality and asset selection, not just deadlines. 

Common questions I hear (and quick answers) 

• “Should I wait for rates to fall further?” No crystal ball needed: if a GRAT or CLAT makes sense for your goals now, today’s rate is the only one that matters for that trust. You can “ladder” multiple trusts over time as rates evolve, much like CDs, if rates continue to fall. 

• “Can I refinance a family loan without creating a gift?” Often yes, if you follow the rules: repay or replace the old note with a properly documented new note at the then-current AFR and ensure terms reflect fair value. Get counsel involved; details matter. 
• “Is a CRT off the table?” Not at all. If you’re selling a low-basis asset and want lifetime income and charitable impact, a CRT can still be a great choice. Just know the deduction math is less rate-helpful when 7520 is low. 

The bottom line

Falling rates don’t change whether you should plan. They change which levers are most effective. GRATs, CLATs, and AFR-based loan techniques generally get a tailwind when the 7520 and AFR move down. QPRTs and CRTs may still have a role, but the comparative math shifts. And with the federal exemption now set to $15 million per person starting in 2026 (indexed), you can focus on quality design rather than end-of-year sprints. Pair your philanthropic intent, family goals, and portfolio reality with the right structure and today’s lower rates can help you move more to the people and causes you care about, efficiently and on purpose. 

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.