Inflation, market swings offer estate planning opportunities

Rising interest rates can have a significant impact on estate planning.

Some tools are more effective when interest rates are rising. Likewise, declines in the stock market or in home values can create opportunities to optimize your giving and reduce future estate taxes.

Talk to an attorney about estate planning in the current economic environment.
Depending on your situation, you may wish to consider strategies like these:

  • Charitable Remainder Uni-Trust (CRUT). Under a CRUT arrangement, an individual and a charity share a pool of assets donated by the individual. The giver takes distributions of both principal and income for a defined term. Afterwards, the charity receives the remaining assets. This is a tax-exempt arrangement and assets grow tax-free.
    You can receive an income tax deduction the year you contribute to the CRUT equal to the “actuarial value” of the assets that will ultimately pass to the charity. The calculation includes IRS interest rates at the time of contribution, with higher interest rates translating to a higher assumed future value. Transferred CRUT assets are also exempt from capital gains taxes.
  • Qualified Personal Residence Trust (QPRT). A QPRT is an irrevocable trust that allows the creator to remove a personal home or vacation property from their estate for the purpose of reducing the gift tax.
    The owner continues living on the property with a “retained interest.” When that period is over, the interest transfers to beneficiaries as a “remainder interest.” Because the owner retains a portion of the value, the future gift value is lower, thereby reducing the gift tax.
    The value of the property during the retained interest period is calculated based on applicable federal rates from the IRS. The higher the IRS rate, the higher the value of your retained interest and the lower the calculated value of the gift to your family. If your house has temporarily decreased in value as interest rates have risen, that will compound your tax saving benefits.
  • Annual gifts. In the same way a down housing market can be a good time to put a house into a QPRT, a bear market can be a good time to gift stocks. In 2023 the annual gift tax exclusion is $17,000. If stock values are down, you can optimize this gift by giving stock with a high likelihood of appreciation. Your beneficiaries reap the value of future growth, tax-free.
  • Roth conversions. When converting a traditional IRA to a Roth IRA, income tax is calculated on the value of the securities in the account at the time of conversion. That makes it advantageous to do conversions when the market is down.

During times of inflation, it’s also important to remember that the cost of living is climbing far faster than the interest available in savings accounts. That means your cash in low interest accounts is quickly losing value. Consider investment strategies that can allow you to maintain a measure of liquidity with better performance over traditional savings.

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