Inflation and Estate Planning

May 31, 2023

Inflation is always an issue that needs to be considered as part of the estate planning process. This is due to the fact that inflation can impact the estate planning process in multiple ways. These ways include the fact that rising prices can leave you without the money you need in your later years. They can also include unforeseen tax consequences when it comes time to distribute your assets to your heirs. Fortunately, there are steps that can be taken to protect your estate plan from the impact of inflation. Our Long Island estate planning lawyers have the experience necessary to help with all sides of this complicated issue. Read more below to learn about how to protect your estate and your heirs against inflation.

Why Inflation Matters to Estate Planning

There are two ways in which inflation can impact your estate plan. The first is the fact that rising costs can create the risk that you are without the assets you need to care for yourself in your later years and beyond. The second impact of inflation is that it can create tax consequences for your heirs if you own assets that are increasing in value. We will discuss each of these issues in turn.

An estate plan is typically set up so that you can care for yourself in your later years before passing your remaining wealth on to your heirs. Money will need to be set aside for your living expenses, medical costs, and more. If money is not set aside for these items, then any outstanding bills at the time of your death will need to be paid out of your remaining assets. This can lead to a smaller estate being left to your heirs than what you had planned. This means, therefore, that if the cost of your later years increases, then less will be left to your heirs.

Inflation can also result in unforeseen tax consequences falling upon your estate. People typically think of increasing daily living costs when they hear the word “inflation.” Such costs may include higher gas prices, larger bills at the grocery store, etc. While inflation is typically thought of in terms of what people pay for things, there is another end to the equation. That other end is the fact that if you own the types of assets that are rising in value during inflationary times, the potential for estate taxes is rising as well. An example of this would be real estate, which typically increases in value. So while inflation can mean that the assets being passed to your heirs are more valuable, it can also mean that much of that appreciation is lost to taxes.

Estate Planning Considerations In Regard To Inflation

The first step in determining how inflation will affect your estate planning is to identify your goals. Once you have identified what it is you want to achieve, you can then structure your portfolios and estate planning instruments in a way that will better meet those goals. The goals of your estate plan can typically revolve around three primary considerations:

  • Taking care of yourself in your later years – There are several expenses you will need to pay in your later years. These, obviously, include your living expenses. They also include the costs of medical care and possibly the cost of assisted living. 
  • Costs and bills related to your estate – When it comes time for your heirs to receive your assets, there can be several costs and bills related to your estate which will reduce their inheritance. If money is not set aside to pay funeral expenses, any outstanding medical bills, and other money you owe to creditors or third parties, then those amounts will be deducted from the assets you mean to go to your heirs. It is important, therefore, that items such as these be planned for.
  • The future of your beneficiaries – You are leaving assets to your heirs for their benefit. Deciding what benefits you wish for them to receive will impact how you distribute your assets.

Structuring Your Estate Plan So That It Meets Your Goals In Spite Of Inflation

There are several ways in which an estate planning attorney can assist you in structuring your affairs so that they meet your goals. These include the following:

  • Taking care of yourself in the short-term – If you have personal expenses and medical costs to pay in the short term, you will need liquid assets, which are relatively stable in value (such as cash or government bonds ), to meet those costs. Keeping more than what you are going to need, however, can result in the purchasing power of your assets being eaten away by inflation. Regularly working with both a financial planner and an estate planning lawyer can help you to ensure that you are maintaining enough liquidity while ensuring that you are not unnecessarily losing wealth to inflation.
  • Ensuring that there are no extra costs related to your estate – The costs related to your estate, which are discussed above, are another area that will require you to hold a certain amount of stable assets which are liquid. Again, it is best not to keep more low-return, high-liquidity items than is necessary. Doing so would mean that the real value of your estate would be lost to inflation. Many expenses, such as a burial plot, can be prepaid. Importantly, preparing a proper power of attorney can enable your loved ones to move assets from high-return instruments to more liquid instruments so that you are not keeping more cash than is necessary.
  • Assets left to your beneficiaries – If you are leaving behind items that appreciate in value, such as real estate, then there is a risk of estate taxes coming into play if you hold meaningful assets. It is important that you work closely with your lawyer and financial planners to make sure that these taxes are foreseeable and legally avoided where possible and that the payment of them is built into your estate planning. This helps to ensure that your heirs do not see their inheritance lost to taxes.

Contact a Long Island Estate Planning Lawyer Today

Inflation is a concern for everyone. With that said, many do not stop to think of how it can impact their estate plan. Doing so can help to ensure against unforeseen consequences. Speaking with an experienced lawyer is the first step in protecting your estate. Contact our Long Island estate lawyer by telephone at (631) 234-3030 or schedule a consultation today.