The Federal Reserve’s recent decision to raise its benchmark interest rate may prompt investors to review not only their portfolios, but also their long-term financial plans. Because many financial planning strategies are influenced by IRS-published interest rates, changes in rates can affect the relative attractiveness of certain strategies. In this higher interest-rate environment, investors may want to consider several planning opportunities that could help support their broader financial goals.
These are the two key IRS interest rates that influence financial planning:
Applicable Federal Rate (AFR). The IRS publishes three applicable federal rates each month: a short-term rate of up to three years, a mid-term rate of more than three years and up to nine years and a long-term rate for loans exceeding nine years. These are based on average market yields for US Treasury securities of comparable maturities.
IRS Section 7520 rate. Published monthly, this rate is equivalent to 120% of the applicable federal mid-term rate, rounded to the nearest two-tenths of 1%. The rate is often referred to as the “discount” or “hurdle” rate for determining the value of certain property interests in split-interest trusts, including charitable trusts and Grantor Retained Annuity Trusts (GRATs).1 As of October 2026, the 7520 rate is 5.6%.
Interest rates can have a significant impact on the outcome of certain financial planning strategies. Consider the impact of rising interest rates on a Grantor Retained Annuity Trust (GRAT). Over the trust term, the grantor receives annuity payments based on the value of the assets initially transferred to the trust and the applicable IRS Section 7520 rate. At the end of the term, any remaining assets that have appreciated beyond the 7520 rate (referred to as the “hurdle rate”) can pass to the beneficiaries with little or no federal gift and estate taxes. When structured properly, a GRAT can be an effective wealth transfer technique. However, the amount of wealth ultimately transferred can vary dramatically depending on the prevailing interest rate. Consider this hypothetical example:
- GRAT is funded with $2 million in assets
- Assets within the trust grow at an annualized growth rate of 8%
- The GRAT term is three years
- Following the end of the GRAT term, the amount of wealth transferred to heirs through the GRAT strategy will differ depending on the IRS Section 7520 interest rate
2% IRS Section 7520 rate = roughly $268,000 transferred to heirs
4% IRS Section 7520 rate = roughly $180,000 transferred to heirs
6% IRS Section 7520 rate = roughly $90,000 transferred to heirs
Source: Franklin Templeton research. Hypothetical example for illustrative purposes only. Actual results will vary based on investment performance, trust structure, prevailing interest rates and other factors.
A GRAT is an example of a planning strategy that generally becomes more favorable when IRS Section 7520 rates are lower. Conversely, other financial planning strategies may become more attractive in a higher-interest rate environment.
Strategies to Consider as Interest Rates Increase:
Charitable Remainder Trust (CRT). With a CRT, the donor or other noncharitable beneficiaries, such as heirs, receive payments from the trust for a specified period or for life. Any remaining assets are ultimately distributed to the charitable organization. Because the IRS Section 7520 rate is used for calculating the present value of the charitable remainder interest, a higher rate can generally result in a larger charitable income tax deduction, assuming other factors remain unchanged.
Qualified Personal Residence Trust (QPRT). This strategy allows an individual to transfer a residence to an irrevocable trust while retaining the right to live in the home for a specified term. At the end of the trust term, the residence passes to the beneficiaries, typically outside of the grantor’s taxable estate, assuming the grantor survives the length of the trust term. Transferring the residence into the trust results in a taxable gift, albeit reduced since the individual retains the right to live in the residence for a length of time. Because the prevailing IRS Section 7520 rate is used to determine the value of the retained interest in the residence, higher rates will generally result in a lower taxable gift when the QPRT is established.
Tax-loss bond swap strategy. Investors who own bonds in taxable accounts may consider exchanging existing holdings for newer, higher-yielding bonds as interest rates rise. If the original bonds have declined in value, selling them may generate a capital loss that could potentially be used to offset capital gains elsewhere in the portfolio. The strategy may also be implemented using mutual funds or ETFs that hold bonds, although investors should carefully consider the underlying holdings and investment objectives before proceeding. Investors should also be mindful of the tax wash-sale rules when implementing a tax-loss bond swap. The replacement investment should not be substantially identical to the security sold, which may be achieved by selecting bonds with different issuers, coupons, maturities or other characteristics. Because the application of the wash-sale rules can be complex, investors should consult a qualified tax professional before proceeding with this strategy. For additional information, see IRS Publication 550, Investment Income and Expenses (https://www.irs.gov/publications/p550).
Seek Guidance
There may be other general financial planning considerations in a rising interest-rate environment. For example, higher rates may provide opportunities for retirees and other investors seeking to generate income stream—an objective that may have been more challenging during periods of historically low rates. The impact of higher interest rates can vary significantly based on an investor’s goals, financial circumstances and overall portfolio. Investors should consult with a financial professional to evaluate how these and other considerations may apply to their individual situation.
Follow Bill Cass, CFP®, CPWA®
Endnotes
- Grantor Retained Annuity Trust (GRAT): An irrevocable trust into which a grantor transfers assets while retaining the right to receive fixed annuity payments for a specified period. At the end of the trust term, any remaining assets generally pass to the designated beneficiaries.
WHAT ARE THE RISKS?
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