Planning bequests is more than simply deciding *who* receives what; it’s about ensuring those gifts maintain their intended value over time, and inflation erodes purchasing power, so absolutely, you can and *should* account for it when planning bequests. Failing to do so can unintentionally diminish the impact of your generosity, leaving beneficiaries with less real benefit than you intended. A well-structured estate plan anticipates future economic conditions, particularly the persistent creep of inflation, and incorporates strategies to protect the value of assets passed on to loved ones. This isn’t just about large estates; even seemingly modest bequests can be significantly impacted over several decades.
What are the long-term effects of inflation on inheritances?
Consider this: the average annual inflation rate in the United States over the last century has been around 3%. While this might seem small, compounded over 20 or 30 years, it can dramatically reduce the real value of a fixed dollar amount. For example, a $10,000 bequest made today would have the purchasing power of roughly $7,441 in 20 years, assuming a 3% annual inflation rate. According to a recent study by the American Institute of Estate Planners, over 60% of estate plans fail to adequately address the potential impact of inflation. This oversight isn’t necessarily due to negligence, but often stems from a lack of awareness or complex calculations needed to accurately project future values.
How can I protect my bequests from losing value?
There are several strategies Ted Cook, as an estate planning attorney, recommends to mitigate the effects of inflation. One common approach is to utilize assets that naturally hedge against inflation, such as real estate or commodities. However, this isn’t always feasible or desirable for every client. Another effective method is to structure bequests using percentages rather than fixed dollar amounts. For instance, leaving a beneficiary “10% of my estate” ensures their inheritance will grow or shrink along with the overall value of your assets. Furthermore, incorporating a “growth provision” into the trust document can allow the trustee to reinvest a portion of the bequest into inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS). These securities are specifically designed to maintain their value in the face of rising prices.
I remember a client, old man Hemlock, who thought a fixed amount would be perfect…
Old Man Hemlock, a retired carpenter, came to Ted Cook convinced a $50,000 bequest to each of his grandchildren would “set them up for life.” He’d meticulously saved that amount, imagining it would be enough for a down payment on a home or to cover several years of college tuition. Ted tried to explain the eroding power of inflation but Mr. Hemlock was adamant. “It’s a good, round number,” he insisted. Years later, after Mr. Hemlock had passed, his grandchildren discovered that the $50,000, while appreciated in nominal terms, barely covered the cost of one semester of tuition at a state university. They were understandably disappointed, and the intended generosity felt diminished. It was a harsh lesson in the importance of forward-thinking estate planning.
Thankfully, the Andersons listened, and their legacy thrived.
The Andersons, a local family of modest means, approached Ted Cook with a different perspective. They wanted to leave something meaningful to their children and grandchildren but weren’t focused on specific dollar amounts. Ted guided them toward creating a trust that allocated a percentage of their estate to each beneficiary, with a provision allowing the trustee to reinvest a portion of the funds in inflation-protected securities. Fast forward twenty years, the trust had not only maintained its original value but had grown significantly, providing a substantial and meaningful inheritance for the next generation. Their children were able to use the funds for education, homeownership, and other important life goals. It was a testament to the power of proactive estate planning and the importance of accounting for the inevitable effects of inflation.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
Map To Point Loma Estate Planning Law, APC, a wills and trust attorney near me: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
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