Keep in mind that, although the Federal Gift and Estate Tax basic exclusion amount is $12,920,000 per individual for 2023 and increases each year to adjust for inflation, the basic exclusion amount is scheduled to decrease by 50% in 2026 unless the law is otherwise changed.

For purposes of this analysis, assume that the hypothetical client Alice is seeking to transfer her wealth to her children, Ned and Fred.

Grantor Retained Annuity Trust (GRAT)

The GRAT is established by creating a trust in which the client contributes assets, the client retains a right to receive an annuity from that trust for a certain term of years, and the remaining assets will be distributed to other beneficiaries. The client is subject to the Federal Gift Tax for only the amount that is actuarially calculated to be distributed when the term of the trust ends, not the actual amount.

A common version of this strategy is the “zeroed-out” GRAT. The goal is to calculate the annuity amount that must be paid to the client over the term of the Trust so that the calculation of the remaining assets to be distributed to the beneficiaries is equal to $0. The applicable rate used for this calculation is known as the “7520 Rate” because it is governed by Internal Revenue Code Section 7520. For the months of August through November of 2020, the 7520 Rate was at a record low of 0.4%. If Alice contributed $1,000,000 of assets to a GRAT in August 2020 and retained an annuity payment of $502,993 for two years, then Alice would be deemed to have made a gift of $0. However, if the assets actually grew at a rate of 9%, which is slightly less than the average return of the S&P 500 from 1992 to 2001, then the GRAT would have $136,845 of remaining assets to distribute to her children.

If Alice implemented this same strategy in February 2023, when the 7520 Rate is 4.6%, the result would be that she still transfers $136,845 to her children at the end of the term of the trust, but she would need to use $59,403 of her basic exclusion amount for this transaction. If Alice wanted to “zero-out” the gift, she would need to retain an annuity payment of $534,760, and the final distribution to her children would be worth only $70,452.

Intentionally Defective Grantor Trust (IDGT)

Another commonly used strategy over the past decade has been the IDGT. The IDGT is a grantor trust for income tax purposes, but a non-grantor trust for purposes of the Federal Gift and Estate Tax. In other words, Alice would be responsible for paying any taxes on the income generated by assets in the IDGT, but the assets in the IDGT are not considered as part of Alice’s taxable estate upon death.

One technique used with this strategy is the client’s sale of assets to the IDGT in exchange for a promissory note with a low interest rate. If Alice merely transferred the assets to the IDGT, it would be considered a gift and she would need to utilize some of her basic exclusion amount to recognize that gift. If she sells the assets to the IDGT for fair market value, then it is not a gift. To avoid imputed interest on the promissory note, the IDGT must pay a minimum amount of interest, known as the applicable federal rate. The applicable federal rate is governed by Internal Revenue Code Section 1274. There are three specific rates: the short-term rate (debt instrument with a term of three years or less), the mid-term rate (debt instrument with a term of more than three years but not more than nine years), and the long-term rate (debt instrument with a term of more than nine years).

In March 2021, the short-term rate was 0.11%, a historical low. If Alice sold $1,000,000 of assets to an IDGT in March 2021, the sale could be structured so that the IDGT pays back 0.11% of interest for three years and a balloon payment of $1,000,000 at the end of the three-year term. If the assets grew at a rate of 9% per year, the result would be that the IDGT returned $1,003,300 to Alice by the end of the term, the IDGT was able to keep the remaining assets of approximately $291,423, and Alice did not need to use any basic exclusion amount for this transfer. Those assets will remain in the IDGT and will not be counted as part of Alice’s taxable estate upon death.

In February 2023, the short-term applicable federal rate is 4.47%. Assuming that the client can find an investment that appreciates at an annual rate of 9%, this strategy is still beneficial, but the result is not as significant due to the higher interest rate. Under this scenario, the IDGT would have returned $1,134,100 to Alice by the end of the term, and the IDGT was able to keep the remaining assets of approximately $148,498.

Intra-Family Loans

Rather than creating a trust, clients could also simply loan assets directly to their intended beneficiaries. The recipient of the loan could then invest the transferred assets and pay interest back to the client at a rate that is usually lower than traditional bank loans.

Alice could loan $1,000,000 to her sons. The applicable federal rate would also apply to these intra-family loans. If Alice had loaned this amount to her sons in March 2021 with the same terms described above for the loan to the IDGT, her sons could keep whatever earnings they could generate in excess of the $1,000,000 original loan amount and total interest payments of $3,300. However, if Alice makes this loan in February 2023, her sons would benefit only if they could generate more than $134,100 (the amount of interest that they would owe back to their mother).

Qualified Personal Residence Trust (QPRT)

A QPRT permits a client to transfer the personal residence to a trust for the benefit of someone else, but the client will retain a right to live in the house for a term of years. At the end of the term, if the client wishes to remain in the house, the client would pay fair market rent to the QPRT or to the beneficiaries of the trust.

Assume that Alice was 70 years old in August 2020 when the 7520 Rate was 0.4% and she transfers her personal residence, worth $1,000,000, into a 10-year QPRT for the ultimate benefit of her children. Alice retains a right of reversion if she dies within the 10-year term. Under this scenario, the taxable value of Alice’s gift is $652,860.

Contrast that situation to today’s higher-interest rate environment. If Alice made the same transfer in February 2023 (and assume that she is still 70 years old), the same gift with the same terms would result in a taxable value of only $433,350.

Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs)

If the client has any charitable intentions, the use of charitable trusts may be beneficial. In times of low-interest rates, CLTs have provided more opportunities for clients. In times of higher interest rates, CRTs increase in value. The calculations used to determine various tax values is based upon the 7520 Rate.

Assume that Alice contributes $1,000,000 to a Charitable Lead UniTrust (“CLUT”) for the benefit of her favorite charity. The CLUT will pay 5% of the CLUT’s value annually to her favorite charity for the remainder of her life, and the remainder of the CLUT will then be distributed to her sons upon her death. If she makes this gift to the CLUT in August 2020, her charitable deduction is calculated to be $479,690 and the gift tax value of the transfer is $520,310. However, if this same transaction occurred in February 2023, Alice’s charitable deduction is calculated to be only $467,050 and the gift tax value of the transfer is $532,950.

As an alternative, Alice may want to consider a Charitable Remainder UniTrust (CRUT). The CRUT will pay 5% of the CRUT’s value annually to Alice for the remainder of her life, and the remainder of the CRUT will then be distributed to her favorite charity. If she contributed $1,000,000 to a CRUT in August 2020 when the 7520 Rate was 0.4%, Alice’s charitable deduction is calculated to be $520,310. However, if this same transaction occurred in February 2023 when the 7520 Rate is 4.6%, her charitable deduction would be $534,710.

In conclusion, it is important to consider the economics of these strategies as interest rates change over time. What was a beneficial plan in recent years may no longer be ideal for a client, and conversely it may be worthwhile to explore strategies that did not make economic sense for clients during recent years.

R. Nicholas Nanovic is chair of the Estates Planning team at Gross McGinley. He partners with his clients to design comprehensive and customized estate plans that meet his clients’ goals. provides estate planning and tax law counsel to individuals and business owners.