Creating an estate plan is the best way to safeguard what happens to your assets after you’re gone. However, since we’re in a period of inflation (and we have no idea how long it will last) now might be a good time to reconsider the ways you plan to transfer assets.
Inflation affects costs, so with higher inflation, money doesn’t go as far. Generally, you create an estate plan to provide for others after you’re gone including – spouse, children, grandchildren, and even beloved charities. So, for example, if you wanted to pay for your spouse’s home and medical care, inflation makes it harder to know what that cost will actually be.
Beneficial Estate Planning Tools During Inflation
No matter what “tool” you choose to use you’ll need to consider the current and future impacts on how the assets will grow and how they will be taxed.
A trust is a tool that can be set up as a way to ensure your assets go your selected beneficiaries at the specific time you want them to receive the gifts. They also often offer tax benefits for you and/or your heirs. Homes, retirement/brokerage/ cash accounts, property like cars, jewelry, and antiques can all be put into a trust. However, these assets in a trust are not “frozen”, which means they are still impacted by inflation.
1. Charitable Remainder Unitrusts
A Charitable Remainder Unitrust (CRUT) allows you (or a named beneficiary) to receive distributions for a fixed period of time, with the remaining assets given to charitable organization(s) you pre-selected. You’ll get the benefit of the charitable tax deduction in the year your transfer the assets into the trust.
You will put assets into the trust. Based on how you set up the trust you (or your beneficiaries) will receive income annually. This income continues to be distributed to you (or your beneficiaries) until a specified date at which point, the remaining money stops going to you/them and is given to your selected charities.
Example: You put $100,000 into a CRUT with a distribution of $5,000 per year distributed to your grandchild for 10 years. After the term ends, you want the remaining to go to a local food bank. In the years 2022-2032, your grandchild receives $5,000 every year (a total of $50,000). In 2032, the term will end and the remaining $50,000 is distributed to the local food bank.
As the donor, you get an upfront tax deduction for the value of the remainder that will go to your selected charities. This amount is determined in the month the trust is funded (or the prior two months) and when inflation is high, the IRS rate tables assume the charity will earn more from trust. Therefore, the “future value” of the donated asset is worth more, so the deduction is higher.
2. Qualified Personal Residence Trust
A Qualified Personal Residence Trust (QPRT) allows you to remove a personal home from your estate while continuing to live in it. This both reduces your current taxable estate AND reduces the amount of gift tax that will be incurred when transferring assets to a beneficiary.
You transfers a house (either your personal residence or a secondary home) to a relative by putting it into a trust. However, you will continue using it for a period of time. This transfers the full value of the residence out of your taxable estate at a gift tax cost equal only to the remainder value of the residence taking into consideration your right to continue living in the residence for a period of years.
A higher IRS interest rate means a higher imputed value of your retained right of occupancy. If you move it in now and it is transferred in a time of lower inflation, there will be less that is deemed transferred as a gift to your family. Since you retain both the right to live in the home for a term of years and a reversionary interest if you die during that term, the value of the gift is only a fraction of the value of the entire home.
3. ROTH Conversions
Converting a traditional IRA into a ROTH is something to consider for a few reasons. First, if you’re investing your IRA in stocks, the market is down, so you’re likely not earning as much as you’d like. Second, the tax you’ll pay to make the conversion is based on the value of the marketable securities in the account (which are lower right now). It’s pretty simple to do the conversion itself, but we recommend you talk to BOTH your CPA and a wealth management advisor to make sure the current and future outlook for a ROTH conversion works in your particular situation.
4. Give Gifts
You can make an annual tax-free gift of up to $16,000 (indexed for inflation) that does not count against your lifetime gift tax exclusion. During inflation, you can consider making gifts of low-value stock with high appreciating value.
You could also consider making taxable gifts of low-valued assets that exceed the annual exclusion. Even though those gifts would count against your lifetime exclusion, any future appreciation would grow estate tax-free. Like with a ROTH, we recommend you talk to BOTH your CPA and a wealth management advisor to make sure the current and future outlook of the gifts and beneficiaries work in your particular situation.
These options are only a sampling of what you can choose to do with your estate planning, but they give you an example of how changes in the economy can affect your plans for the future. Avizo offers Wealth Management services if you’re looking for ways to diversify your savings strategies. Of course, we can also walk you through the current and future tax implications of the trusts/plans you are considering. Contact us if you’d like to set up a meeting to review your current estate plan or set up something new.
Earl Blackmon, CPA
Avizo Group offers Wealth Management for clients who would like assistance in investing, saving, and portfolio diversification. This is an area of need for many of our clients who want to invest but need someone they know and trust to help them. Earl Blackmon holds a Series 7 and Series 66 license.