Many people know how Federal Reserve policies influence the economy and investment markets, but they don’t realize how interest rate moves change the results of estate planning strategies.

The Federal Reserve increased rates significantly in 2022 and 2023, and recently market rates spikes again. The significant increases in rates the last few years alter the advantages of different tax strategies.

When interest rates rise, the payoffs of some strategies increase while other strategies lose some of their appeal. After a significant change in yields, review some strategies that you might have rejected a couple of years ago and consider stopping the use of strategies that were attractive back then.

When rates were lower, low-interest family loans were an effective tax and estate planning tool. But now, higher interest rates have to be charged on the loans to avoid negative tax consequences. The strategy is less attractive. Low-interest loans aren’t bad, but they’re not the great deal they were before 2022, as I explained an article I presciently titled “This Could be the Best Time to Make Low-Interest Family Loans.”

Higher rates also make grantor retained annuity trusts (GRATs) less attractive. GRATs have been popular for years. They produce the most benefits when funded with assets that are expected to appreciate rapidly over the next few years, such as stock of small, growing companies.

The grantor of a GRAT receives fixed annual payments of principal plus interest over a period of time, usually two to five years. The trust retains or pays to the beneficiaries the investment returns that exceed the interest paid the grantor. There are no gift or estate taxes on that amount.

Higher interest rates mean more has to be paid to the grantor to avoid tax consequences, so the investments have to earn higher returns to have the same benefits they did a few years ago. GRATs still can be useful but are likely to deliver lower benefits.

On the other hand, charitable remainder trusts and charitable gift annuities are more attractive at higher interest rates. These tools pay income to the taxpayer (or beneficiaries designated by the taxpayer) for life or a period of years. A charity receives what’s left after the income payments stop.

When a CRT or CGA is set up, the taxpayer receives a charitable gift tax deduction equal to the present value of the amount the charity is projected to receive in the future. Higher interest rates increase that present value and the tax deduction.

In addition, higher rates mean a CGA will pay higher lifetime income to the donor than in the recent past.

A charitable lead trust is the opposite of a CRT. In a CLT, the charity receives income for a period of years before the property reverts back to the taxpayer or is transferred to a beneficiary named by the taxpayer. The tax deduction for funding a CLT is lower when interest rates were higher.

Another strategy whose benefits increase when interest rates rise is the qualified personal residence trust (QPRT).

In a QPRT, a taxpayer puts either a first or second home in a trust. (It’s usually best to use a second home.) The taxpayer retains the right to live in the home for a period of years. Then, title to the home passes to the beneficiaries of the trust, usually the taxpayer’s children.

When the home is transferred to the trust, that’s a taxable gift equal to the present value of the home’s projected value when the trust beneficiaries receive it in the future.

The higher current interest rates are, the lower the value of the gift. That means you can transfer the house out of your estate and keep it in the family at a lower gift tax cost than a few years ago.

QPRTs weren’t used much when interest rates were low. But now that rates are higher, people with vacation homes should consider putting them in QPRTs for their children.

These strategies all are called split interest gifts. In general, you continue to own or receive benefits from the property for a period of time before the property is transferred to either beneficiaries or charity. The values of the different interests are determined using current interest rates and formulas issued by the IRS.

The interest rates used are known as the 7520 rates, also known as the applicable federal rates, issued monthly by the IRS. You can find the latest rates by doing a web search for “applicable federal rates.”

An estate planner can use software to show the tax benefits of the different strategies in your situation. There also are some free calculators on the web.

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