Volatile economic signals present opportunity for beneficial re-evaluation of estate and business plans

The initial months of 2022 have featured economic news quite different from recent years, and the U.S. economy is facing multifaceted inflation. First, there is money supply related inflation: the growth rate of all dollars in circulation increased 36% over the two-year period from March 2020 to March 2022, in particular as the federal government pumped money into the system as part of various COVID-19 relief programs. Second, inflation is being driven by geopolitical issues related to the crisis in Ukraine as well as ongoing supply chain issues. The Consumer Price Index rose 8.5% for the 12 months ending March 2022, the largest 12-month increase since December 1981. 

On May 4, the Federal Reserve increased the federal funds rate by 0.5 percentage points, the highest increase in 22 years. At the time, Fed Chair Jerome Powell said, “Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down.” It is widely expected that the Federal Reserve will increase the federal funds rate several more times this year.  

On the estate and charitable planning side, IRS-provided interest rates are a critical component in calculating the benefits for clients as they review various strategies available to them. While these rates—the Section 7520 rate and the Applicable Federal Rate (AFR)—are still relatively low from a historical perspective, they are rising rapidly. For example, the Section 7520 rate has increased from 1% in October 2021 to 3% in May 2022.  

After more than a decade of record low interest rates, the combination of inflation and increasing interest rates has investors jittery; however, it also presents an opportunity for high-net-worth individuals to review and adjust their existing strategies for estate planning, business planning, financial planning and wealth management.  

Estate planning 

Despite recent interest rate increases and the expectation that rates will continue to rise for the foreseeable future, it is important to keep in mind that interest rates remain historically low. That being said, now is a good time to consider locking in strategies that tend to perform well with low rates. Now is also a good time to evaluate strategies that perform well when rates are high in anticipation of further rate hikes. 

Four strategies to consider while interest rates are low include: