How Inflation Impacts Estate Planning: 4 Ways to Protect Your Family’s Future

While we see glimpses of hope that inflation is easing, the high cost of living (COL) has many re-evaluating their financial strategies. Inflated costs for essentials such as housing, food, and healthcare mean that our money simply doesn’t go as far as it used to. For estate planning, this has significant implications. Many are increasingly concerned about how these economic trends will affect their beneficiaries. It is now more important than ever to keep your plan updated.

1. Reduced Purchasing Power: How Inflation Is Affecting Inheritances

One of the primary goals of estate planning is to ensure that your loved ones are financially secure after you pass away. However, as the cost of living increases, the purchasing power of money decreases. This means that the inheritance you leave behind may not provide the same standard of living for your heirs as it would have in the past. What might have been a comfortable sum to support your beneficiaries’ needs a decade ago may now fall short due to inflation and rising expenses.

The increasing costs of housing, healthcare, and daily living expenses are placing a strain on everyone’s budget. For your beneficiaries, this means that the funds they inherit may be more quickly depleted as they cover these essential costs. In light of this, it’s wise to consider the possibility that your beneficiaries may need more support than you initially anticipated.

Strategy: To combat this, you might need to reassess the amount you plan to leave to your beneficiaries. Consider allocating more assets, setting aside a portion of your estate for specific purposes (like housing or healthcare), or exploring ways to grow the value of your estate over time with smarter investment choices like additional insurance or income-producing real estate. Regularly reviewing and adjusting your estate plan can help ensure that your heirs maintain the financial stability you intended for them.

2. Asset Value Fluctuation: Navigating Estate and Tax Implications

Inflation can significantly impact the value of your assets, such as real estate or business interests. As these assets increase in value due to inflation, so does your net worth. This can lead to higher estate taxes at death, potentially reducing the net amount your beneficiaries receive. Similarly, higher asset values can result in increased income taxes, such as capital gains taxes, when assets are sold.

Strategy: Implementing strategies like gifting assets during your lifetime, setting up trusts to reduce estate taxes, and timing asset sales to minimize capital gains taxes can help protect the value of your estate. Updating or creating new trust documents can manage the distribution of your assets and minimize tax liabilities.

Trusts can provide control over how and when your assets are distributed, protect assets from creditors, and offer tax advantages that aren’t available with outright gifts. Working with an estate planning attorney and a financial advisor can help you create a plan that takes these factors into account.

3. Protecting Inherited Wealth: Why Trusts Matter More Than Ever

Given the rising cost of living, it’s essential to protect the inheritance you leave behind to ensure it lasts. Instead of leaving assets to your beneficiaries outright, consider placing them in an Inheritance Trust™. Trusts can provide a layer of protection against the “Killer D’s” of divorce, debts (creditors), disputes (lawsuits), disability benefits (like Medicaid), death taxes and destructive spending habits (addiction, poor money skills). They can also manage assets wisely for your beneficiaries’ lifetimes or even the lifetimes of your beneficiaries’ children.

Strategy: An Inheritance Trust can provide regular distributions to your beneficiaries or limit access to funds for specific purposes, such as education or healthcare. Best practice, however, is to implement an independent trustee with power to make distributions for any purpose, in any amount and at any time. This type of independent management offers superior protection against third party claims to the inherited assets as well as a “gatekeeper” of sorts to control the rate of spending. An Inheritance Trust can provide assurance that the inheritance is used as you intended and remains available for your loved ones when they need it most.

4. Multi-Generational Living: Estate Planning for Shared Household Expenses

Another trend related to the rising cost of living is the increase in multi-generational households. More families are living together to share costs and provide mutual support. Estate planning can play a key role in facilitating this arrangement. 

Consider, for example, a time when your child moves back home to provide you with care, or you move in with your child. In such a case who will inherit the home when you die? Should it still be divided equally among all of the children, even if the caretaker child desires to remain in the home?

Or, imagine a situation in which you gift funds to your child towards the construction of an in-law apartment or renovation of their home to accommodate you moving in. Perhaps their share of the estate should be reduced to account for this early inheritance, in order to treat all your beneficiaries equally?

Strategy: With more families sharing homes, estate planning might include providing funds for a larger family home, setting up a trust to manage shared household expenses, or planning for the care of elderly parents or young children. You might also need to adjust your estate plan to account for any early inheritance provided to a child in the form of home renovations or care arrangements.

By recognizing these trends and planning for them, you can help ensure that your estate supports the unique needs of your family, both now and in the future.

Conclusion: The Importance of Regular Estate Plan Reviews

Inflation and the rising cost of living is a reality that impacts us all, and it’s important to reflect this in your estate planning. By regularly reviewing and updating your estate plan, you can ensure that it meets your family’s current needs and adapts to economic changes. Our TrustSupport™ program was designed with this very purpose in mind. Whether it’s adjusting the amounts left to beneficiaries, utilizing trusts for protection, or planning for tax implications, staying proactive in your estate planning will provide peace of mind and security for you and your loved ones.

If you would like to discuss these options, please schedule a 15 complimentary appointment with one of our Senior Paralegals.