Inflation’s Impact on Estate Planning

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Inflation instantly calls to mind higher prices and higher interest rates. This of course affects our day-to-day purchasing power, but it also affects our long-term financial planning. How will it impact our ability to save? Another question that everyone should be asking is — how will it affect my Estate Plan? Does inflation impact estate planning?

To begin, inflation is an economic term that describes the way that goods and services increase in price over time. Inflation measures the purchasing power you lose over time, or how far your dollar will stretch today versus tomorrow. But can you measure inflation’s impact on estate planning?

High inflation can be caused by a “hot economy,” when consumers have relatively high disposable incomes to spend, and access more credit. Today, we are experiencing a different cause of inflation called “inflationary bursts.” This is caused by supply shortages and increased demand following the aftermath of a global pandemic. One example illustrating this is gas prices that are historically high.

Inflation can make estate planning tricky. Although we know the value of our assets today, we don’t necessarily know the value of our assets tomorrow. In most scenarios, we simply want the value of our assets to increase over time. This means that our wealth is growing, and we have more to leave to our loved ones.

Just to clarify, inflation is not necessarily a bad thing. Thanks to inflation, some of your assets will increase in value, like any property you own. Inflation can help increase the value of your estate as a whole.

However, inflation can cause unexpected and unwanted outcomes for your estate plan without proper planning.

Can I avoid the impact of inflation on my estate plan?

Here are some tips to help hedge your estate plan against unwanted inflation.
• Keep An Eye on Tax Thresholds: In 2022, the federal estate tax exemption is $12.06 million until 2025. State tax thresholds are much lower, with some of them as low as $1 million. Illinois’s exemption is $4M

• Take Action As Needed: If you become concerned about your total estate value and its proximity to federal or state tax thresholds, it’s time to take action. It may make sense to gift assets out of your estate now, to also keep future growth out of your estate.

• You can also exercise the Gift Tax Exclusion. The current IRS annual exclusion for gift tax is $16,000. These exclusions are in addition to your lifetime exemption limit of $12.06 million. By giving gifts throughout your lifetime, such as to charities and loved ones, you could methodically reduce the size of your estate.

• Assess Your Estate Plan as Inflation Changes: Assessing your estate plan should be an ongoing process. Even if you are far beneath the tax thresholds today, inflation could cause a sneaky rise toward it. Further, the government can adjust thresholds, exemptions, and interest rates at any time. We recommend assessing and evaluating your estate plan on an annual basis at minimum.