Inflation can add new challenges to estate planning. It can increase asset values, legal fees and everyday living costs. That means you may need to revise your estate plan, or set one up sooner than you expected, to protect the legacy you want to leave.
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Here are several ways inflation might reshape your planning and concrete ways you can respond.
A key goal for many people is to leave enough for loved ones to handle future expenses. If prices rise sharply, the same amount of money will buy less of what your heirs need. A sum you once considered adequate might not stretch as far due to increased costs for housing, groceries, healthcare and more.
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If you’ve already planned to leave fixed sums of money to your beneficiaries, check whether inflation has made them less effective. Adjust the amounts based on current living expenses.
A good way to counteract inflation when it comes to bequests is to add assets to your estate that may grow over time, such as index funds or real estate. This way, your assets are more likely to keep pace with or outgrow inflation. Talk to a trusted financial professional to make sure your investment choices match your tolerance for risk.
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Estate planning usually involves professionals, including attorneys, accountants and possibly appraisers. Inflation can raise their fees. That means you might pay more now to create or update essential documents such as wills, powers of attorney or various trusts.
Ask for estimates from multiple attorneys or planning firms. You could discover that some offer flat fees or lower rates for common tasks. Instead of minor tweaks every few months, aim for one thorough update every year or two unless a big life event happens, such as a marriage, divorce or major asset purchase.
Rising Asset Values and Increased Tax Exposure
Inflation can push up real estate and stock prices, which might raise your estate’s total value. While that can feel like a win, it may also trigger higher estate taxes. The thresholds for federal estate tax are adjusted yearly, but they may not keep pace with rising asset values. This gap could create a tax burden on your heirs.
Moving assets to loved ones while you’re alive can reduce the size of your taxable estate. This might help you stay under certain tax thresholds, depending on the rules at the time.Irrevocable trusts, like a spousal lifetime access trust or a grantor trust, can move appreciating assets out of your estate. That lowers potential estate taxes, though these structures usually come with legal fees and formalities. Work with an estate attorney and tax professional who can track changes in tax laws and make sure you use the best strategy for your circumstances.
