Everyone loves inflation, right? No? When you are looking at the effects of inflation on your estate plan, you may realize there is a bit of a silver lining and there are some opportunities to consider.
Review Your Estate Plan
This actually has nothing to do with inflation. You should be doing it periodically any way. But for purposes of estate planning, an inflationary period is a not-so-subtle reminder that your review is overdue. You may find a way to accomplish more of your plan at a faster pace.
Impact of Inflation on the Value of Assets
The uncertainty of how long (or how high) a current inflationary period will run has put downward pressure on the value of equities. The impact on the value of real estate has been less pronounced but with interest rates climbing, the impact on real estate values are expected. With depressed values of equities, there is an opportunity to make gifts right now.
Annual Exclusion Gifts
Consider that, for gift tax purposes, the amount of the gift is the fair market value of what is being transferred when it is transferred. The annual gift tax exclusion, meaning how much one donor can give to one donee each year, is increased when inflation dictates. For 2014 through 2017 it was $14,000. For 2018 through 2021, it was $15,000. In 2022 it is $16,000.
Let’s say you have 1,000 shares of a stock that was worth $20,000 in 2021, that is now worth only $16,000 due to the market volatility. In 2021, you could not have given away all the shares of stock without incurring a gift tax. But in 2022, with a lower market value and a higher gift tax exclusion, ALL of the shares can be given away, AND be excluded from gift tax. And, it is expected that the impact of inflation will mean that the gift tax exclusion may be increased again for 2023 and beyond.
Beyond Annual Exclusion Gifts
It is not just the annual exclusion amount for gifts that increases with inflation. So does the gift/estate tax lifetime exemption. In 2021, the exemption was $11.7 million per person. For 2022, that amount increased due to our friend inflation!) to $12.06 million per person. The impact is that, for someone who had already used up the lifetime exclusion in 2021, there was an additional $306,000 that could be transferred in 2022 without incurring a tax. As with the annual exclusion for gifts, the impact of inflation will mean that the lifetime gift/estate tax exclusion may be increased again for 2023 and beyond and additional assets will be available to be moved out of one’s taxable estate.
Keep and Eye on the Future and Take Advantage When You Can
Remember that the 2017 tax law changes expire on December 31, 2025 if the law is not renewed. That would mean the lifetime gift/estate tax exclusion will revert to $5 million per person. Now, that figure will be adjusted for inflation as well, so it would be a bit higher than that. There are, as usual, a lot of moving parts with tax laws and market values and inflationary periods. Don’t just focus on the cost of a gallon of gas, though. Take a step back, review your assets and your estate plan, and look to see if there are opportunities for you to accomplish more of your goals at a faster pace.
If you would like further information on your estate plan or need guidance in creating one, learn more about our Estate Planning & Probate group or contact us today.