Estate Planning, Inflation and Interest Rates -- Have You Adjusted?
Estate planning aims to provide certainty amid numerous variables. However, recent spikes in inflation, interest rates, and market volatility are prompting professionals to reconsider their strategies.
Impact of Inflation on Estate Planning
Inflation affects the future value of assets, real estate valuations, and taxes owed on distributions. Accurately determining estate value is essential for measuring potential estate tax liabilities and planning for their payment.
Rising inflation also influences gift exemption levels, which are adjusted annually on January 1st when warranted. For 2022, the annual exclusion for gifts is $16,000 per donor, with amounts exceeding this counting toward the lifetime exemption of $12.06 million per person. This lifetime exemption works in conjunction with the estate tax exemption and covers transfers made through the estate.
Federal inflation estimates determine adjustment amounts, though these projections aren’t always accurate. If actual inflation exceeds government projections, an estate could become taxable solely due to inflation. Additionally, when the 2017 Tax Cuts and Jobs Act expires in 2025, exemption amounts are scheduled to decrease significantly unless Congress intervenes.
Interest Rates and Estate Planning Strategies
While some professionals believe inflation has minimal impact on long-term estate planning, rising interest rates require serious consideration due to their effect on various strategies.
Charitable Remainder Trusts (CRTs) become more attractive in higher interest rate environments. These irrevocable trusts offer partial tax deductions on initial donations, generate tax-exempt income, and distribute income to grantors or beneficiaries for specified periods before transferring remainder assets to charity.
GRATs and QPRTs become less advantageous with rising rates. Grantor Retained Annuity Trusts (GRATs) lock assets into irrevocable trusts where beneficiaries receive IRS-set annual income, with appreciation passing to heirs with minimal gift taxes. Qualified Personal Residence Trusts (QPRTs) allow grantors to remove home value from estates at reduced gift tax costs, though if the grantor dies before the trust expires, the residence value is included in the taxable estate.
Next Steps
Your estate planning attorney can review current plans considering rising interest rates and inflation to determine which strategies remain viable and identify the best path forward. Individual counsel is essential for your specific situation.
If you or a loved one needs assistance with estate planning, do not hesitate to contact The Stegall Law Firm for a consultation.
