The state of the economy will impact your estate planning.
For better or worse, money is necessary for life in American society.
People work to earn money to pay for food, clothing, shelter, and healthcare.
When the economy changes, so do the financial circumstances of individuals and families.
According to a recent Financial Advisor article titled “Estate Planning For A New Day,” estate planning strategies often must be adjusted to account for factors like inflation and interest rates.
The value of assets and real estate is not impervious to inflation.
If nothing else, inflation will impact the taxes owed.
To begin changing your estate plan to address the state of the economy, you should get a valuation of your assets within your estate.
This will help you better understand what taxes you will owe and prepare for their payment.
Another way inflation affects estate planning is through the federal gift and estate tax exemption.
These levels are reset ever year on January 1.
If necessary, the exemption levels are increased to account for inflation.
For this reason, the federal estate and gift tax exemptions will increase from $12.06 million this year to $12.92 million in 2023.
This will allow wealthier clients to be able to make larger gifts without counting against the lifetime exemption for the individual.
In 2022, the amount is $16,000 per donor for gifts not paid directly for the tuition or medical purposes of a donee.
For 2023, this amount rises to $17,000!
Amounts given in excess of this threshold will be be subtracted from the lifetime exemption amount.
This lifetime estate and gift tax exemption is used to remove a certain amount of wealth from the federal estate and gift tax.
The amounts for these adjustments are made according to federal inflation estimates.
If the federal adjustment is inaccurately tied to the actual inflation rate of the economy, then an estate could become taxable simply as a result of inflation.
With the 2017 Tax Cuts and Jobs Act expected to expire in 2026, the amount for the exemption threshold is expected to “sunset” to $5 million (as indexed for inflation).
So, without another act of Congress, the lifetime exemption amount with either revert to the previous level or lower.
Although some people believe economy does not have practical impacts on estate planning, they overlook how inflation impacts interest rates and their connection to estate planning strategies.
Some trusts are better for higher interest rates.
Charitable remainder trusts are better when higher interest rates are a reality.
What is donated to the trust is partially tax-deductible.
The income generated in a charitable remainder trust is tax exempt.
The funds from this irrevocable trust are distributed to beneficiaries and the grantor for an allotted time and then the remaining funds are given to charity.
QPRTs and GRATS require declining interest rates to be effective.
With a GRAT, the assets are held in the irrevocable trust and annual incomes are withdrawn from the trust according to an interest rate set by the IRS.
After the allotted time, the appreciation of the original assets with the payout rate exempt passes to the heirs with minimal or non-existent gift taxes.
Qualified personal residence trusts (QPRTs) are not as beneficial in a high interest rate environment.
With this trust, the value of a residence is held in an irrevocable trust for a set time.
The grantor can live in the home and retain partial interest in the value of the home.
After this set time, the remaining value is transferred to heirs.
The purpose is to keep the family home out of the estate and reduce its liability for estate and gift taxes.
If the grantor dies before the expiration of the trust, then the residence is included in the estate and taxed accordingly.
If your estate plan was created when the economy was significantly different, you will want to schedule an appointment with an experienced estate planning attorney to review your plan and to provide guidance on whether current strategies should be revised, scrapped, or replaced.
Reference: Financial Advisor (Oct. 1, 2022) “Estate Planning For A New Day”