Estate Tax Savings – Inflation’s Golden Lining?

The inflation rate in the United States hit 8.2 percent year over year in the month of September meaning it is at a multi-decade high, according to NBC News. The spike in inflation has caused pain for many Americans due to the increase in food prices, housing prices, and medical care. However, there may be a golden lining to the ever-increasing inflation rate – reduced estate taxes.

Reports indicate inflation could actually help save high-net-worth individuals close to $700,000 by reducing the estate tax bill that’s imposed on their assets when they pass on.

How Inflation Impacts Estate Taxes

Many people do not know that the estate tax is indexed to consumer costs. Since prices for food, clothing, housing, etc. have increased due to inflation, an adjustment will be made to the amount exempted from estate tax liability. Analysts predict the total amount couples will be able to shield from the estate tax could spike to more than $25 million. This exempted amount is a major deviation from the current estate tax exemption, which stands at $12.06 million per person.

The estate tax adjustment is just one component that is accompanied by a series of changes to various taxes and Social Security benefits triggered by rising prices due to inflation. Many of these adjustments automatically occur so taxes and benefits are able to remain roughly constant in inflation-adjusted dollars.

The increases, dictated by long-standing provisions in the law and set by arcane formulas, come without lawmakers on Capitol Hill having to do anything, according to a great article in Politico. The IRS recently announced there will be more than 60 inflation-related adjustments to the tax code, including increases for how much individuals can contribute to their 401(k) retirement accounts to the earnings thresholds at which different tax brackets take effect.

How You Can Benefit from the Inflation Adjustment Now

The estate tax generally becomes an issue after an individual passes away. However, people do not necessarily have to pass on in order to benefit from the inflation adjustment impacting the estate tax. Specifically, people have the option to transfer funds, along with other assets, to their children and other individuals without incurring a tax bill while you are still alive. These gifts also provide the benefit of reducing your potential exposure to estate tax liability.

The inflation-related adjustments to gifts are expected to enable individuals to give away, without incurring any tax liability, up to $17,000 per person annually. In addition, the increased gift threshold does not negatively impact an individual’s estate tax exclusion. Gifts beyond that would reduce their exemption.

To give you an idea on how this would work in practice, let’s say you have a married couple with three children and six grandchildren. In this scenario, the married couple could conceivably give their children and grandchildren a whopping $272,000 annually without impacting the amount of their assets excluded from the estate tax.

Have Questions? Contact InSight Law Today

Deciding whether to move forward with a large gift to a family member, and calculating the potential impact on your estate tax exclusion can be complicated quickly. This is why it makes sense to speak with an experienced and knowledgeable trust and estate professional with InSight Law. Contact our office today to schedule a meeting.