Inflation is always on the agenda for estate planners.
The general population might not fear this reaper to the same extent: many articles on the subject begin, with only a hint of plagiarism, by suggesting the reader interview anyone who ‘remembers the 1970s’ to gain a full understanding of the ‘prices ever-upward’ phenomenon.
The present writer is one of those grizzled veterans, with memories of bellbottoms, FM radio and the hell called disco, as well as the oil embargo, gas lines, a stumbling economy, loss of confidence in the world’s most upbeat nation – and inflation, year after year, the indifferent robber of rich and poor alike. Yes, I was there.
Inflation has been determinedly nibbling at our capital ever since, but it hasn’t taken a voracious bite in recent memory. The young ones don’t know, though planners and advisors try to warn them of the erosive effect and the particular vulnerability of post-retirement portfolios. We have the tools to fight back, and customers need to know why they must fund them.
The problem of inflation will never abate – it’s part of the environment. In the fabled ‘70s, my father used to complain, when I’d beg $5 for a movie, “In the ‘30s, a movie cost five cents.” And then he’d tell me, again and once again, how you’d get a newsreel, a cartoon, even a live performance for your nickel. “Mind you,” he’d add, every single time, “that was a lot of money in those days.”
This confused a bit – was inflation so bad? There was no mistaking how much better life had become in my father’s lifetime (although none of us will hear Bing Crosby sing live as a Saturday matinee ‘bonus’), so I wondered if this inflation stuff was really so threatening.
Then, I learned. The US was defeated in Vietnam and suddenly seemed vulnerable. The oil crisis ensued and cheap gas and home heating oil became memories, instantly. The nation’s infrastructure was in tatters, cities needed rebuilding, industry was outdated and markets long dominated were slipping from our grasp – our future was in doubt. It was a shock still felt by older folks and there’s been nothing quite like it since.
The last remark may now need qualifying. The pandemic is abating in some regions, like Western Europe and parts of the US; still virulent in others, including Russia and Indonesia; and resurging elsewhere, even in countries with advanced healthcare systems, like Israel. The shock to lives and psyches has been great, unassuaged by positive social transformation, as accompanied the troubled ‘70s.
Signs of global economic recovery are appearing, which should technically bring the inflationary threat in its wake – a concern we’d gladly face. Another danger is arising in tandem, one we haven’t yet considered: deflation. It’s a curious concept, one that confounds even the cleverest.
In the right circumstances, deflation can be a healthy sign of rising productivity, but at other times – like today – it’s a reflection of declining economic activity. What does our immediate future hold?
Following its recent study of conditions in Canada, France, Japan and the US, the Federal Reserve rates the likelihood of significant deflation as low (except perhaps in Japan, where inflation has been limited for years). Investor sentiment – not always directly correlated with evidence – is generally upbeat, says the Fed. For now, at this point, in the short term, the threat seems limited.
In our office, we’re hoping for a steady recovery, but planning, as usual, for the worst. We hear that in Cambodia, tuk-tuk drivers are sharing a hard-nosed joke with their passengers: a virus we can survive, but not empty bellies. We all hope for the best, but cannot afford to be sanguine. The situation may not be equally dire in all locales, but whatever the pain, it’s deadly serious for the affected parties.
What we really want is strategies that are useful today, which also set the pattern for future planning. Everyone knows now that great shocks, unbidden and unexpected, are part of the landscape. What moves can estate planners recommend to clients as protection against both inflation and deflation?
Now is the time for giving – we’re telling this to clients, particularly the wealthier ones. Recall the elevated $11.4 million estate and gift credit for 2020. This favorable exclusion limit will return to pre-reform levels on January 1, 2026. A national election is due in November and depending on the outcome, the elevated unified credit might be lost even sooner.
For clients worried about estate tax liabilities, this creates a timely opportunity to clear depressed stocks and bonds from an estate’s books, effectively leveraging the corona crisis depression effect against the generous unified exclusion. Those securities will recover one day, likely soon, suggesting that early heirs should not be disappointed, let along ungrateful.
Future planning should include careful examination of the uses of trusts. Disclaimers can be included to allow the recovery of donated assets if the client ever faces a major decline in the value of their estate, whatever the cause. Trusts can also be structured to allow asset swaps. If a portfolio in the trust declined sufficiently, a client could exchange it for assets of equal value. The depreciated securities or other assets could then be sold, providing a potentially useful capital loss.
Grantor Retained Annuity Trusts are an effective hedge against price appreciation or decline. The grantor transfers assets to the GRAT and receives an annual income for an established term. When that term expires, remaining assets are paid to the beneficiaries, with no tax due. The grantor must take care not to die before the established term expires, or else the GRAT assets will return to his or her taxable estate, to the dismay of the intended beneficiaries and the estate’s tax specialists.