Understanding the GRAT Hurdle Rate

What the “GRAT hurdle rate” actually means

The term GRAT hurdle rate refers to the Section 7520 interest rate, published monthly by the Internal Revenue Service (IRS). This rate is the benchmark used to determine whether a Grantor Retained Annuity Trust (GRAT) successfully transfers wealth to beneficiaries without triggering gift or estate tax.

There’s no hidden complexity here. A GRAT either clears this hurdle or it doesn’t.

If the assets inside the GRAT grow faster than the Section 7520 rate, the excess appreciation passes to beneficiaries free of gift and estate tax. If the assets fail to outperform the hurdle rate, the grantor receives the assets back through annuity payments. No wealth transfer occurs, and no gift tax is incurred. Aside from legal and administrative costs, the transaction is effectively a wash.

This binary outcome is intentional. GRATs are designed to be asymmetric, with a limited downside and the potential for a meaningful upside if the assets outperform the hurdle rate.

How the Section 7520 rate is calculated

Under Internal Revenue Code §7520, the interest rate used to value certain transfers, including GRATs and charitable interests in trusts, is calculated as follows:

• 120% of the applicable federal midterm rate (AFR)
• Compounded annually
• Rounded to the nearest two-tenths of one percent
• Fixed for the month in which the valuation date occurs

For example, in January 2025, 120% of the applicable federal midterm rate was 5.10%. Rounded to the nearest two-tenths of one percent, the Section 7520 rate for that month was 5.2% (IRS, Nov 2025).

That single number governs every valuation inside a GRAT created in January 2025. Later rate changes are irrelevant to that trust.

How the hurdle rate functions inside a GRAT

The trust’s success depends entirely on how the assets perform relative to the hurdle rate, and that outcome is locked in by how the GRAT is structured at the outset. When a GRAT is created:

• The grantor transfers assets into the trust.
• The grantor retains the right to receive a fixed annuity for a defined term.
• The present value of that retained annuity is calculated using the Section 7520 rate in effect when the trust is funded.
• The remainder interest, what is left after the annuity payments, is treated as a gift to the beneficiaries for tax purposes.

The success condition

A GRAT works only if the assets inside the trust appreciate at a rate that exceeds the Section 7520 hurdle rate.

• Outperformance: Excess appreciation passes to beneficiaries outside the grantor’s taxable estate.
• Underperformance: Assets are returned to the grantor via annuity payments. No tax benefit, but no tax harm.

This structure limits downside risk while preserving upside potential, which is precisely why GRATs remain part of sophisticated estate plans.

Why GRATs are sensitive to interest rates

GRATs tend to work best when interest rates are low because a lower hurdle rate makes it easier for trust assets to clear the required benchmark. As rates rise, the margin for success narrows. The structure still works, but outcomes become far more dependent on precise asset selection, trust terms, and timing. What once tolerated average performance now demands intention and discipline.

Interest rates and estate planning more broadly

Many estate planning strategies rely on interest rates to determine how assets are valued when they are gifted or loaned to individuals or trusts. Shifts in rates don’t uniformly improve or impair planning. Instead, they change which tools are most effective, requiring strategies to be reassessed rather than reused by habit.

How interest rates change which strategies work

Interest rates don’t make estate planning strategies “good” or “bad.” They change the math underneath them. Some structures rely on low benchmarks to transfer appreciation efficiently. Others become more effective when the IRS assumes a higher return.

Strategies that tend to benefit when rates fall

Intrafamily loans

Intrafamily loans are private loans between family members, commonly used to support home purchases or investments. To avoid being treated as a gift, the loan must charge at least the IRS-mandated Applicable Federal Rate (AFR). Any appreciation earned above that rate belongs to the borrower, not the lender’s estate.

When interest rates fall, AFRs fall with them. That widens the gap between the loan’s required interest and the potential return on invested assets, making intrafamily loans more effective as wealth-transfer tools.

Grantor Retained Annuity Trusts (GRATs)

GRATs are directly tied to the Section 7520 rate. The annuity the grantor must receive is calculated using the rate in effect when the trust is funded, and that rate remains fixed for the life of the GRAT.

Lower rates reduce the performance threshold the trust assets must exceed. That’s why GRATs tend to thrive in low-rate environments and struggle as rates rise.

Intentionally Defective Grantor Trusts (IDGTs)

IDGTs allow assets to grow outside the taxable estate while the grantor continues to pay income taxes on trust earnings. When assets are sold or loaned to the trust, the interest rate is typically tied to the AFR.

Lower AFRs increase the likelihood that trust assets will outperform the note, improving the effectiveness of the strategy. As rates rise, asset selection and growth assumptions become far more critical.

Strategies that tend to improve as rates rise

Qualified Personal Residence Trusts (QPRTs)

Intrafamily loans are private loans between family members, commonly used to support home purchases or investments. To avoid being treated as a gift, the loan must charge at least the IRS-mandated Applicable Federal Rate (AFR). Any appreciation earned above that rate belongs to the borrower, not the lender’s estate.

When interest rates fall, AFRs fall with them. That widens the gap between the loan’s required interest and the potential return on invested assets, making intrafamily loans more effective as wealth-transfer tools.

Charitable Remainder Annuity Trusts (CRATs)

GRATs are directly tied to the Section 7520 rate. The annuity the grantor must receive is calculated using the rate in effect when the trust is funded, and that rate remains fixed for the life of the GRAT.

Lower rates reduce the performance threshold the trust assets must exceed. That’s why GRATs tend to thrive in low-rate environments and struggle as rates rise.

Charitable trusts and the Section 7520 rate

The Section 7520 rate also governs the valuation of charitable interests in trusts, including charitable lead annuity trusts (CLATs). Lower rates reduce the taxable value of the remainder gift in CLATs, while higher rates increase deductions in CRATs.

Section 7520 rates in 2025

These aren’t abstract figures. They are monthly execution thresholds, and recent history shows exactly where that hurdle has been sitting.

Month-2025 and Section 7520 Rate

January

5.2%

February

5.4%

March

5.4%

April

5.0%

May

5.0%

June

5.0%

July

5.0%

August

4.8%

September

4.8%

October

4.6%

November

4.6%

December

4.6%

How rising rates are rewriting planning in 2025

Interest rates hovering near 5% means that familiar estate strategies need new foundations. Techniques that once worked with modest asset growth now require materially stronger performance to deliver the same results. The hurdle hasn’t disappeared, but it has moved higher, forcing sharper decision-making.

The effects show up quickly:

• Zeroed-out GRATs require far more aggressive or precisely timed assets to succeed.
• Intrafamily loan strategies offer less room for arbitrage as required interest rates climb.
• Some charitable lead structures become less compelling from a transfer-efficiency standpoint.
• Other tools, often overlooked in low-rate periods, quietly regain their advantage.

The takeaway isn’t that planning tools stop working. It’s that the environment now punishes autopilot and rewards intention.

Tactical implications

Effective estate planning in 2025 starts with recalculation, not abandonment. Assumptions built during years of low rates need to be tested against current numbers, not recycled out of habit.

Practical next steps include:

• Re-running projections using current Section 7520 and AFR rates.
• Aligning each strategy to the interest-rate environment it actually favors.
• Watching monthly rate changes for narrow execution windows.
• Coordinating legal, tax, and investment decisions so structure and assets support each other.
• Planning ahead of the scheduled 2026 estate tax exemption reduction rather than reacting later.

Why the GRAT hurdle rate still matters

The GRAT hurdle rate isn’t a technical detail buried in the fine print. It’s the pivot point the entire strategy turns on. When the hurdle rate is understood and planned around, it allows future appreciation to move out of an estate with controlled risk. When it’s overlooked, the result is a trust that’s legally sound, administratively heavy, and yet, delivers no economic benefit.

Planning around the hurdle rate requires more than good intentions.Estate Guru helps advisors and attorneys model rate-sensitive strategies, coordinate legal structure with asset assumptions, and execute plans with clarity before timing windows close.