Given the current environment, it’s likely inflation is also on the mind of everyone.
Inflation: In 2021, inflation was a staggering 7%— the highest the country has seen in 40 years! Inflation creates a “hidden tax” effect and the purchasing power will suffer.
Purchasing power effect: With inflation at 3.5%, purchasing power will be reduced by 51% in 20 years (in other words, your dollar today will be worth 49 cents in 2042). Retirees, widows, and widowers will suffer most.
Health care: Health care costs have been rising at a rate of nearly 5% for the past 40 years.
Longevity: The longer one lives, the more damaging inflation will be. The death of a spouse may cause the surviving spouse to experience the “widow(er)’s penalty”— the likelihood that the surviving spouse will experience higher taxes, higher health care costs, and a reduction in purchasing power caused by inflation.
2. Historically low interest rates
Changing interest rates affect estate planning. Some strategies are more effective in environments with higher interest rates, while others are more effective with lower interest rates.
• Lower IRC Section 7520 and applicable federal rates provide opportunities for tax-efficient wealth transfer
• For certain strategies to succeed, investments need higher returns than interest rates, and that’s easier with lower rates
• Lending strategies can be more advantageous in a lower interest rate environment
Coupled with high federal estate tax exemption amounts, people who use certain strategies in the lower interest rate environment have the ability to transfer wealth while incurring minimal or possibly no gift taxes.
We will discuss the next 2 reasons in the next blogpost.