How Inflation May Impact Estate Planning

Understanding Inflation

Although most consumers feel the effects of inflation on their wallet, making sense of the term can be difficult. Simply put, “inflation” is an economic term that measures the purchasing power of a currency. When inflation rises, a dollar buys less.

High rates of inflation can have different causes. For example, inflation can be caused by a so-called “hot economy,” when consumers have lots of disposable income and easy access to credit. However, today’s inflation could be characterized as an “inflationary burst.” In other words, the global supply chain is still struggling to meet consumer demand in the aftermath of the coronavirus pandemic.

Inflation and Estate Planning

People create estate plans to provide for their loved ones and establish a legacy.

But estate plans can be affected by inflation. Surprisingly, inflation actually benefits many Americans. For example, most homeowners view their home as a wise investment—an asset that will, in all likelihood, only continue to accrue value over time. So inflation can, very gradually, bolster a home’s price, making it easier to sell for a profit years after it was first purchased.

However, inflation can have unexpected and undesirable outcomes, especially for affluent families who risk crossing the federal estate tax threshold.

Protecting Your Estate From Inflation

Monitoring tax thresholds

California does not have a state-level estate tax. However, the federal government does. While the Internal Revenue Service allows families to exempt up to $12.06 million, this figure could be altered in 2025 to account for inflation.

Taking preemptive action

If your estate’s value is approaching the threshold for federal estate taxation, a California estate planning attorney could help you explore and implement strategies to reduce your obligations. You could, for example, transfer assets to a trust, or make use of the Gift Tax Exclusion to begin reducing your liabilities while you are still alive.

Giving gifts

You can make annual, tax-free gifts of up to $16,000. Since these annual gifts do not count against your lifetime gift tax exclusion, you could seize the opportunity presented by inflation to gift low-value stock with rapid appreciating value.

Exploiting market volatility

If you have a traditional Investment Retirement Account (IRA), you could benefit from a Roth conversion. Since the income tax on a Roth conversion is calculated on the value of the marketable securities in the account, today’s weak market could help you maximize your future retirement savings.

Substituting trust assets

You could review the value and basis of assets you have deposited into an irrevocable living trust. If your trust includes the power to substitute assets, you should consider transferring out low-basis with higher-basis assets in your current taxable estate. Substituting trust assets could help the lower-basis assets receive a “step up” after you have passed away.

Reviewing your estate plan regularly

Even if you do not believe that your estate plan could be jeopardized by inflation, you should still review your will, trust, and other arrangements regularly. You should, for instance, review your estate plan after any major life event such as a marriage, a birth, or the purchase of a new real property.

Related links:

Do You Need to Speak With an Estate Planning Attorney?

If you need to speak with an experienced estate planning lawyer, please contact us online or call us directly at 800.756.5596 to first register for one of our free, informative seminars. Your attendance will qualify you for a special discount for our estate planning services should you decide to make a free appointment at the conclusion of the seminar and choose to proceed with us. Our estate planning law firm proudly serves clients throughout California from our main office in Torrance, as well as those in Redondo Beach, Manhattan Beach, Hermosa Beach, Segundo, San Pedro, and Rancho Palos Verdes.