One goal of estate planning is to bring some certainty to a multitude of variables. Recent increases in inflation, interest rates, and market volatility, however, are causing some experts to reassess their options.
“These past several years, estate planners have been working in a low-interest-rate environment that negated many estate planning opportunities,” says Lawrence Richman, a partner at Neal, Gerber & Eisenberg in Chicago and chair of its private wealth services practice group. But in “today’s inflationary environment,” he says, certain planning techniques “can be actively considered.”
Here’s a partial list.
Inflation
To some, the impact of rising inflation can’t be overstated.
“Inflation is a huge estate planning factor,” says Steven J. Schacter, an attorney at Forest Hills Financial Group in Chappaqua, N.Y. It affects projections of the future value of assets, he says, as well as the length of time it may take for assets to reach a particular value.
What’s more, if inflation changes the real value of an estate, it can also change the taxes due on distributions. “In order to properly execute an estate plan, it is crucial to know the value of an individual’s assets and how the value may change over time,” says James P. Daniels, a managing director at UHY Advisors in Albany, N.Y.
It may also become necessary, he says, “to determine an estate’s liquidity to more accurately measure the ability to pay estate taxes.”
Gifting And Estate Taxes
But inflation can also affect how much you can give away in life or bequeath after death without paying federal taxes on those asset transfers. The exemption levels rise with inflation every January 1.
“Inflation will be causing the federal estate- and gift-tax exemptions to increase significantly this upcoming January, which will give our wealthy clients who have used their annual gift-tax exemption another opportunity to make a large gift next year,” says Steven J. Oshins, a partner at the Law Offices of Oshins & Associates in Las Vegas. “Knowing that our clients will have so much more in exemptions next year, I have been able to plan for this by suggesting [they] make additional gifts in January.”
For 2022, the annual exclusion for gifts—other than for medical or educational purposes—is $16,000 per donor; you may give that amount to as many recipients as you wish. But any gifts over that amount count toward your lifetime exemption, which is currently $12.06 million. The lifetime exemption works jointly with the estate tax exemption amount; it covers transfers given through your estate as well.
Real Inflation Vs. Government Estimates
Yet the amount by which these limits are adjusted every January is determined by federal inflation estimates, which aren’t always accurate.
“If ‘real’ inflation exceeds the government numbers, it is possible that an estate could become taxable due to inflation alone,” cautions Steven Podnos, a physician and certified financial planner at Wealth Care, a fee-only RIA in Cocoa Beach, Fla.
Another caveat: After the 2017 Tax Cuts and Jobs Act, the exemption amounts doubled, a provision that’s set to expire in 2025 unless Congress acts before then.
“In 2026, the lifetime exemption amount will revert [to its old level], or perhaps even lower,” says Tyler Sterk, a wealth advisor at Kayne Anderson Rudnick in Los Angeles. “Luckily, if you make a gift today that exceeds [the future exemption level], you will still secure your current lifetime exemption.”
Landon Rogers, a wealth advisor at Gratus Capital in Atlanta, concurs. “It’s a great time to lock in historically high exemptions before the 2025 sunset,” he says.
Interest Rates
Others argue that inflation should be kept in perspective. “Inflation has little impact on estate planning, which by its very nature is a long-term endeavor not subject to trade-like activity,” says Jeffrey R. Lauterbach, an attorney and wealth advisor in Chadds Ford, Pa.
Lauterbach concedes, however, that inflation is often tied to interest rates, and interest rates do matter. When interest rates rise, he says, “some strategies become more advantageous and others fall out of favor.”