When economic conditions decline, contacting your financial planner is top of mind. Sometimes less considered is contacting your estate planner, but that is equally as important.
Factors such as inflation, interest rate hikes, and changes in asset values impact finances as well as your future wealth-transfer strategies. Working with an estate planner, savvy individuals can turn today’s economic drawbacks into future wealth-transfer rewards.
Role of a Financial Planner
Financial planners and estate planners perform different, but complementary, roles. Financial planners assist you in managing wealth during your lifetime. They help assess financial health and goals, review investment strategies, and help make decisions to promote future financial freedom. Retirement and portfolio planning exemplify valuable services provided by financial planners.
During times of economic turmoil such as now, your financial planner can guide you through decisions to rebalance your investment portfolios and manage your budget.
Role of an Estate Planner
Estate planners assist you in preserving and distributing to beneficiaries the wealth accumulated during your lifetime. They offer advice and services beyond those of any other financial professional.
Your estate planner can help ensure your assets are properly organized and protected during life, through trust vehicles for example. They collaborate and review estate planning documents to pave a smooth transfer of your assets upon your incapacity or death.
Estate planners can also aid in establishing strategies for “split-interest” transfers of assets (philanthropic or otherwise), which allow you to retain lifetime access to income or property. Upon your death, the remainder of split-interest assets transfer to chosen beneficiaries.
Qualified Personal Residence Trusts (QPRTs)
Split-interest transfers leverage the unique estate planning opportunities offered by periods of inflation or rising interest rates. Estate tax rules value certain assets by using IRS valuation tables, which are based on interest rates. Consequently, when rates increase, table valuations increase.
Interest rates particularly impact estate plans employing split-interest strategies. Qualified Personal Residence Trusts (QPRTs) gift your residence to a trust for the benefit of your family while you retain the right to live in the home. The full value is transferred out of your estate, but the retained ownership is valued to determine the residual gift (the higher the interest rate, the lower the gift).
Charitable Remainder Unitrust (CRUT)
Another split-interest strategy that is beneficial in a higher rate environment leverages your philanthropic goals. A Charitable Remainder Unitrust (CRUT) involves creating a trust to benefit you or select beneficiaries for a period with annual distributions.
The assets remaining at the end of the period pass to charity. This is an effective estate planning technique that also provides income tax benefits from the present value of the future charitable donation. Like a QPRT, the higher the interest rate the greater the retained value going to charity, thus creating a higher income tax deduction in the year the trust is funded.
Qualified estate planners can assess whether changes in asset values due to depressed markets create advantageous opportunities for gifting or swapping assets between your trusts and your estate.
If your current or desired estate plan involves split-interests such as life estates or remainder interests, contact a qualified estate planner at SVA to maximize your strategy given the uncertainty of current economic conditions.
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