Creating an Inflation-Proof Estate Plan

Inflation is affecting more people in recent years, no matter who you are or what your estate planning style is. From 2011 to 2022, the inflation rate has risen from 3.2% to 8.3%.

Regardless of what your estate plan looks like, feeling at least some of the impact of inflation is unavoidable. But there are reliable methods of lessening those repercussions.

What Is Inflation?

Inflation happens when the cost of basic goods like groceries and gas goes up and causes people’s purchasing power to go down. Purchasing power is a way of describing how valuable a currency is. In other words, it refers to how many goods or services a single monetary unit would get you.

When things are more expensive, you don’t need to be an economist to see that the same amount of money will get you less. And if you have assets that aren’t growing fast enough to keep pace with the inflation rate, your estate is bound to undergo some devaluation.

When safeguarding your estate against inflation, it may be helpful at this point to return to the basics of why you want to have a strong estate plan in the first place.

The Importance of Estate Planning During Times of Inflation

Estate planning is a way of managing your assets, allowing them to be distributed to your beneficiaries after your death. It’s a good idea to manage and revisit every once in a while, maximizing the benefits to ensure that all beneficiaries get the most out of your estate. You’ll know you’re putting your assets to good use, even when the economy isn’t doing so great.

It’s never the wrong time to give your estate plan another look, and an extra set of eyes may also serve you well – especially if they belong to an estate planning lawyer. Luckily, a few estate planning tricks may help you during economically turbulent times.

Start by going over your plan from the top. Look over every aspect and explore every detail. Each asset should be evaluated individually, including both cash and real estate. These are two of the most common types of assets, but there are many others – none of which should be left out.

You should also pay close attention to tax deferred assets, such as 401K plans, individual retirement accounts (IRAs) and other types of pre-tax accounts. While estate taxes may or may not be an issue for you, those accounts will either be subject to income tax when you withdraw them or your beneficiaries withdraw them.

Watch Out for Lethargic Assets

There should be growth with every asset that you have in your estate plan. If they don’t seem to be growing, it’s always good to check in just to make sure.

Many find this helpful because it gives them something to look for that’s quantifiable, so this part of estate planning doesn’t have to be quite so enigmatic as some other elements. You’ll know that it’s time to take action if assets are becoming stagnant.

Making sure your plan is inflation-proof also involves a comprehensive portfolio evaluation. Through this process, you’ll verify what your assets are worth in the current market. This is an important step because the value of any given asset is constantly in flux.

Don’t forget about investment vehicles either, which are products that investors use to gain positive returns. Stocks and bonds are prime examples of these. By watching how those markets perform over an extended time frame, you can make a well-informed decision as to whether or not it’s time to modify the way you approach investing.

Other popular investment vehicles include charitable trusts and irrevocable trusts. If you go with the latter, your taxable estate doesn’t go up based on the appreciated property value. Trusts are invaluable tools that help hold your estate together and minimize liability, softening the blow of inflation.

Tax Liability and Real Estate

Don’t make the mistake of leaving taxes out of your considerations, either. One of inflation’s most significant impacts is on your tax liability.

Real estate prices are known to go up during times of inflation. When real estate is included in your estate plan, this may pose some complex tax issues to your beneficiaries without preventative measures. If you have assets in the form of real estate, inflation will cause those assets to increase in value.

The more diversity, the better when it comes to your estate plan. If you put all your eggs in one basket, your beneficiaries might be the ones paying the price if inflation should strike.

Contact the Knee Law Firm at 201-996-1200 today to set up an appointment with one of our New Jersey estate planning lawyers.