Estate Planning Strategies for Challenging Economic Times

The threat of challenging economic times is always present. Whether economists predict a recession, depression, or slight market downturn, it’s essential to implement strategies that ensure your estate can make it through. We have created a list of estate planning strategies to help you prepare for and overcome unpredictable economic times.

Key Takeaways

• Even during challenging economic times, estate planning helps you protect and maximize your assets.
• Common threats to your estate plan include a volatile market, inflation, international issues, and tax law changes.
• Before implementing strategies to overcome difficult economic times, creating an estate plan is essential.
• Tax exemptions, irrevocable trusts, and gifting assets are strategies you can implement during a recession or depression.
• It’s essential to continue investing, even when in an unpredictable economy.

How Does Estate Planning Help With Challenging Economic Times?

Estate planning, the process of making a plan to transfer your assets and responsibilities to beneficiaries after your death, can help you manage challenging economic times. Structuring your estate through varying trusts allows you to take advantage of change laws that may benefit your assets. Maximizing your charitable gifts and tax deductions can also reduce your taxable liability, helping you keep more of your hard-earned wealth in your pocket.

Common Challenges That Threaten Your Estate

Considering some of the circumstances you’re likely to experience and how they threaten your estate can be helpful. Learn more about some of the most common challenges that can threaten your estate:

• Market volatility: The stock and real estate markets can be highly volatile. As stocks or properties decrease in price, the value of your estate may also decrease.
• Inflation: Inflation affects interest rates, which impacts how much you pay to borrow money or how much you can borrow. Inflation causes an increase in the cost of goods, which may affect the repairs and maintenance needs of real estate assets.
• Geopolitical or international issues: Climate change or political unrest can impact the stock market and the overall value of the dollar.
• Tax law changes: The Internal Revenue Service (IRS) constantly changes the tax law. These changes affect what deductions you can take and how much you may owe in annual taxes.

Estate Planning Strategies for Challenging Economic Times

Study the following estate planning strategies we recommend for challenging economic times.

Create an Estate Plan

Before taking advantage of specific strategies to help protect your assets through tough times, creating an estate plan is essential. One of the biggest misconceptions in estate planning is that you need to be wealthy to create one. This claim couldn’t be further from the truth. Estate planning is crucial for anyone with assets, real estate property, or dependents. 

In addition to outlining your exact wishes and plans upon death, an estate plan also allows you to take advantage of strategies that help maintain your assets during difficult economic times. If you already have an estate plan, changing economic times may be a good time to review it. Use this time to update assets, create new copies of legal documents, and draft clear instructions for your beneficiaries.

Plan for Taxes and Maximize Exemptions

While tax planning is always essential, extra preparation can go a long way during challenging economic times. Stay up-to-date on the latest tax laws, including filing requirements and due dates. Consider how changing tax rules may affect the assets in your estate plan so that you can create a strategy for overcoming higher taxes before you owe them.

One significant consequence of inflation and rising interest rates can be changes to tax exemption laws. For example, increasing inflation often leads to the government increasing the lifetime gift tax exemption, which allows you to gift more funds tax-free.

Consider Trusts

Structuring your assets into trusts allows you to transfer your assets to an entity. Charitable remainder trusts (CRTS) are one example of an appealing trust during periods with higher interest rates. Initial contributions to a CRT are partially tax-deductible, and then any income you earn in the trust is exempt from tax liabilities. Qualified personal residence trusts (QPRTs) allow you to protect real estate assets by placing them in an irrevocable trust for a set period. You can still use the property, but it’s then transferred to your estate and beneficiaries upon your death as a taxable gift.

An irrevocable grantor trust (IGT) freezes your estate when selling an asset that’s likely to appreciate over time to receive a promissory note equal to its value. In return, the property gets removed from your estate, and the IRS doesn’t consider it capital gains, meaning you don’t owe taxes. A Spousal Lifetime Access Trust (SLAT) allows a beneficiary and a spouse to benefit from a trust transfer.

You can also gift assets to an irrevocable trust to avoid taxes. A dynasty trust is a long-term irrevocable trust that allows you and your beneficiaries to avoid the separate transfer tax, which typically gets applied to your beneficiaries. Dynasty trusts can be a wise strategy for families who plan to transfer wealth from generation to generation.

Maximize Donations

Charities need funds more than ever during challenging economic times to help others. You can do good and protect your assets with a charitable lead annuity trust (CLAT), which involves you contributing assets to a charity of your choice for a designated number of years. Any assets left over after the scheduled timeline return to the estate’s beneficiaries. 

You can also access tax benefits through one-time or annual gift-giving. While the tax-exempt gift maximum changes yearly, for 2023, you can gift up to $17,000 per year without tax obligations. The maximum lifetime gift amount is $12.92 million in assets or property. This amount will likely significantly decrease over the next few years. The lifetime limit also fluctuates year over year based on inflation. Additionally, gifting funds for educational or medical expenses aren’t taxable.

Benefit From Low Interest Rates

During challenging economic times, the Federal Reserve System lowers interest rates to help stimulate the economy. Refinancing your assets could save you a considerable amount of money and interest paid, depending on how low interest rates go during these times. Acquiring new assets, especially real estate and land, may be financially beneficial during periods with lower interest rates.

Issue Loans to Family Members

Many lenders may shy away from auto or mortgage loans when interest rates are high. You may lend funds to children or grandchildren during these times to purchase a vehicle or home at a lower interest rate than what they may receive from a banking institution or credit union. However, you must charge at least the Applicable Federal Rate (AFR), the lowest interest rate on loans that won’t lead to negative gift tax consequences. While children or grandchildren must still pay interest, the interest payments stay within the estate.

Continue Investing

It may feel overwhelming to continue investing when market conditions are down. However, this may be the best time to invest since you’ll earn more when you can buy assets lower. It’s essential to continue investing in your future, even when market gains aren’t as high. Continue funding your retirement and savings accounts as budgeted. Purchasing real estate when market values decrease means earning more when the market adjusts.

Convert an IRA to a Roth IRA

Converting a traditional individual retirement account (IRA) to a Roth IRA requires determining the value of the assets you want to transfer on the conversion date. During challenging economic times, you can expect your IRA to be at a lower value, triggering fewer tax liabilities. If your estate benefits from a transfer, it may be best to complete it during less profitable economic times.

Structure Businesses in a Family or Limited Liability Company

Individuals commonly use a limited liability company (LLC) to protect investors’ business assets from interfering with their personal ones. A family limited partnership is similar, except it allows for the continuation of ownership among family beneficiaries and helps with succession planning goals. Structuring your businesses in a family liability company will enable you to maintain authority over the business’s daily operations while transferring assets to the family.

What Do Challenging Economic Times Mean for Your Estate Plan?

It’s pertinent to revisit and update your estate plan as needed. You’ll want to revise your estate plan frequently to include new or sold assets. Suppose you created your estate plan during economic times of high or low interest rates. In that case, you should consider revisiting your plan to consider additional strategies to protect your assets and beneficiaries better.

Schedule Your Personal Estate Planning Consultation Today

Anderson Advisors are here for you during difficult economic times. During a consultation, we’ll review your estate plan and identify any areas of improvement. We’ll help you determine which estate planning strategies best protect your assets and preserve your wealth during fluctuating economies.