Estate Planning During Inflation

The Impact of Inflation on Estate Planning

We’re all feeling the sting of inflation these days in almost every area of our lives, from the gas pump to the grocery store – and, yes, even to our estate plans. While some experts believe our current inflation trends are the temporary result of pent-up pandemic demands, others worry we are on a trajectory of inflation that could last years. Time will tell which economists got it right, but it is important to take steps to protect your estate plan from the possibility of increasing inflation.

Inflation, a general increase in prices that results in a decrease in our purchasing power, has been near a 40-year high in the U.S. since the start of 2022. To combat this, the U.S. Federal Reserve Bank is aggressively raising interest rates to limit the supply of money and bring down the costs of goods.

While this is the right course of action from an economic policy perspective, these rising rates impact several areas of our lives. Mortgage rates are increasing, housing values are decreasing, prices are rising, earnings are falling, and stock prices are dropping. All of this can make estate planning tricky! We may know the value of our assets today, but we don’t necessarily know the value of our assets tomorrow.

If financial stability for your spouse, children, grandchildren, or disabled loved one matters to you, it is important to pay attention to increasing inflation. That’s because it has a direct effect on the money you plan to leave behind.

For example, let’s say you plan to leave $500,000 to a disabled child to purchase a home. While this might seem like enough to buy real estate now, inflation may continue to impact the housing market. By the time your child inherits that $500,000, it may not be enough to buy a home. Inflation can cause unexpected and unwanted outcomes for your estate plan without proper planning.

Here are a few tips to protect your estate plan and beat inflation:

If you don’t have an estate plan, get one – Many people assume estate planning is only for the wealthy, but the fact is everyone needs an estate plan. If you don’t have an estate plan, you’re not alone – 67% of Americans don’t have one. But if you have a house, a bank account, or a car, you have an estate. It’s important to understand that in addition to stating who gets what when you die, estate planning also includes planning for yourself in the event of your incapacity. Accidents and health issues can happen at any age, which is why every person aged 18 and older needs some basic estate planning documents in place.

If you have an estate plan, review it – Estate planning is not a “one and done” event. Your estate plan needs to change as your life changes. Any life event – marriage, divorce, the birth of a child or grandchild – should trigger a review of your estate plan. And inflation counts as one of those life events. It’s important to evaluate your portfolio by reviewing each asset, its current worth, and the change in its value since the last time you reviewed your plan.

Diversify – The old saying, “don’t put all your eggs in one basket” is particularly true for estate planning. Diversification is one of the best ways to limit inflation’s impact on your estate plan. Spreading your investments across stocks, bonds, real estate, and other vehicles can protect your assets, ensure growth, and increase liquidity.

One of the prices that increase during periods of inflation is the price of real estate. If you have real estate as part of your investment portfolio, the increase in value could expose your beneficiaries to future tax liability. Irrevocable trusts and charitable trusts can keep your estate intact while reducing your tax liability. For example, with real estate in an irrevocable trust, the appreciated value of the real estate does not increase your taxable estate.

With inflation on the rise, this is a good time to meet with a trusted estate planning attorney to review your goals and adjust your plans. Current inflation concerns aside, no one knows what tomorrow might bring, By making proactive decisions now, you can guard against worst-case scenarios. Working with a professional can help you find the right strategy for your goals and loved ones.