3 Tax Minimization Estate Planning Strategies For High Net Worth
The older they get, the more ultra-high net worth families start to get antsy about how much of their estate will be lost to the estate tax, rather than go to the places, people, and causes they care about. What they need is estate planning strategies for high net worth.
If you don’t get serious about tax minimization now, before it’s too late, you could end up regretting it dearly. And this is why it’s so critically important for those of you with $5+ million liquid investable assets to download this wealth management and estate guide to build your team before you start trying to address your estate’s finances, along with estate planning strategies for high net worth.
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Pillar Wealth Management understands the stress and pressure involved with developing estate planning strategies for high net worth and doing whatever you can to protect your wealth for future generations. We have worked with families like yours for over 30 years and have handled portfolios ranging from $5 million up to $500 million.
Full Disclosure: We are not CPAs or estate planning attorneys, and you should consult with one if these ideas are appealing to you. Make sure you take as much care choosing CPAs and estate planners as you do when choosing your financial advisor. We do have established relationships with attorneys and CPAs who specialize in working with ultra-high net worth estates and assist us with our estate planning strategies for high net worth.
Furthermore, we make zero money from our clients’ establishment of private foundations, family limited partnerships, or the purchase of life insurance. However, we are here to help you, so feel free to reach out to us via phone at 800-669-6780, email at [email protected], or schedule an appointment online.
Now, back to estate planning strategies for high net worth and minimizing your estate taxes.
There are two broad categories of tax minimization strategies for ultra-high net worth families: Trusts, and everything else. See 7 trusts you can use to minimize your estate taxes
Here, we explore three estate planning strategies for high net worth, which families can use for tax and estate planning purposes so more of your wealth goes where you want.
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Not every approach makes sense for every family, so consider each one, discuss it with the specialists on your team, and make a decision to move forward and secure the future of your family.
If you have more questions, make an appointment to speak to CEO and co-founder Hutch Ashoo about your estate tax challenges, while learning about estate planning strategies for high net worth.
Is estate planning for the rich?
Estate planning is for everyone. Regardless of their net worth, most people are concerned about what happens to their assets when they die. They should make a will as part of their estate plan.
What is considered a high net worth portfolio?
A high net worth portfolio is a portfolio of liquid financial assets whose value is at least $1 million, assets such as cash, bank accounts, money market funds, stocks, and bonds.
How can I reduce the size of my estate?
You can reduce the size of your estate by spending your money. You can also make gifts to charity or to people you care about. You can set up a charitable trust or a business transfer.
Is estate planning only for the wealthy True False?
Estate planning is not only for the wealthy. Regardless of their net worth, most people are concerned about what happens to their assets when they die.
What are the five most important estate planning documents?
The five most important documents are a last will and testament, beneficiary designations, medical power of attorney, durable power of attorney, and a living will.
Why is it important to have estate planning?
Estate planning ensures that the assets in your estate are distributed correctly and smoothly to your beneficiaries. Your estate plan identifies who will manage the distribution of your assets.
What are types of estate planning?
Estate planning may involve only writing a will. In more complex situations, an estate plan may include the creation of a trust, which can apply after death or during the lifetime of the grantor.
What is the difference between a will and estate planning?
A will or an estate plan is a plan of action for your assets when you die, but an estate plan may also apply during your lifetime, for example, if you create a living trust.
What are the key elements of estate planning?
The key elements of preparing an estate plan are writing a will, defining the beneficiaries, selecting a durable power of attorney, and preparing a living will.
How do I prepare an estate plan?
An estate plan defines how your assets are to be distributed when you die or during your lifetime in the case of a trust. You need to define your beneficiaries and the assets they will receive.
High Net Worth Estate Planning
High net worth individuals and families need an estate plan for protection and security — protection from taxes and creditors and security for the future of their wealth and assets.
1. Private Foundation
There are at least two reasons to consider starting a private foundation as part of your estate planning strategies for high net worth.
First, charitable giving can be a very effective technique in preventing wealth from having a bad influence on younger family members.
If you have heirs or other family members who, for whatever reason, you don’t trust to be good stewards of your wealth once you’re gone, a private foundation can restrict their access to and use of your family’s wealth.
Second, a private foundation is a tangible way to use your wealth to make a difference in the world for causes you care about.
Whether you want your wealth to play an active role in world hunger, business innovation, medical research, museums, higher education, or any of the many other good causes you might care about, a private foundation affords you the freedom to pursue those goals, far beyond your lifetime. It should be a priority among your estate planning strategies for high net worth.
See an example of a successful private foundation, plus 9 tips on how to start one.
What is a private foundation?
It is a nonprofit entity that can be funded via cash or appreciated assets. The funding of your foundation will result in a tax deduction, and it will also reduce the size of your estate and therefore your estate taxes. Depending on how the foundation is funded, the amount of your tax deduction can vary dramatically.
Keep in mind that your heirs may have opinions about how much of your money and other assets become part of the foundation. This is a conversation you should have as a family, because the foundation will be much more effective if everyone buys into its existence and its mission.
If, for example, you have $200 million in assets, you could fund a foundation with $100 million, and still have that same amount left to distribute to your heirs. Speaking in very general terms, such a move would slash your estate tax by about $40 million, assuming present tax rates aren’t changed before then.
Not a bad day’s work.
A related wealth protection strategy with a bit less work required is simply to make a very large donation to a particular nonprofit. Be sure to include this strategy in your estate planning strategies for high net worth. Common examples of seven, eight, and nine-figure donations include things like funding a new building on your alma mater’s campus, or paying for a new opera house or museum, and putting your family’s name on it.
Yes, you are ‘giving away’ a large part of your estate. But if you don’t do this, the government will take 40% of it anyway, at current estate tax rates. Now, you’re deciding where it goes, rather than them.
When you combine a private foundation with some of the other estate planning strategies for high net on this list along with a couple of well-chosen trusts, you may have a realistic chance of nearly eliminating your estate tax.
Are you curious about how this move can help your portfolio? Schedule a chat with CEO and co-founder Hutch Ashoo by clicking here, and learn more about estate planning strategies for high net worth.
2. Life Insurance
Life insurance can be crucial in estate planning strategies for high net worth families. Two primary purposes for life insurance are employed most frequently.
First, life insurance can be used to pay the estate taxes so the estate itself stays relatively unscathed.
This situation is common in families where a large portion of the estate is tied up in a business or in real estate – illiquid assets. For example, suppose you own a business valued at $150 million, real estate worth $50 million, but have just $25 million in liquid assets.
At the current 40% estate tax rates, that $225 million estate would owe around $90 million in estate taxes – far more than you have in liquid net worth. This would put your heirs in the very undesirable position of having to sell off your hard-earned assets just to pay the tax.
With an adequate life insurance policy, you can work it out so that the life insurance covers most of that tax, and thereby keep the business and real estate assets within the family.
Combined with other estate planning strategies for high net worth, this can be a very effective approach to protecting your wealth.
The second most common way ultra-high net worth families use life insurance as part of their estate planning strategies for high net worth is to pay proceeds to various family members.
Suppose you have already minimized your estate tax using trusts and other strategies on this list. If, however, you own a business or real estate, and only one of your heirs is up to the task of taking the lead with those, your assets will be divided unevenly.
Using the previous example, suppose you have two kids, but only one of them is capable or interested in taking over your business. That heir would then be inheriting a business worth $150 million. Even if you gave the $50 in real estate and most of your liquid assets to your other child, this is still a very unbalanced payout.
With life insurance, you can set it up so that the child not running the business gets additional compensation, resulting in further motivation to include life insurance in your estate planning strategies for high net worth.
A life insurance policy valued at these amounts will cost a lot. But you can set it up so that the premium payments get removed from your estate without counting against your net worth or your annual gift exclusion.
You can do this through an irrevocable life insurance trust, or ILIT. Learn more about ILITs and other trusts here.
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They need to know about these estate planning strategies for high net worth as much as you.
3. Family Limited Partnership
A family limited partnership can be beneficial, as part of your estate planning strategies for high net worth, for reducing the value of your estate while protecting your assets from loss, especially if family dynamics change over the years. As with many estate planning and tax minimization strategies, these are very complicated to set up, and you need to work with a specialist.
Pillar Wealth Management can recommend specialists such as estate attorneys, tax attorneys, CPAs, and other members of your estate planning team who have deep experience working with ultra-high net worth families. Again, you need to be as selective with these specialists as when you choose a financial advisor who can implement the most fruitful estate planning strategies for high net worth.
If this sounds like a strategy you’d like to try but have more questions, we can help. Schedule a chat with CEO and co-founder Hutch Ashoo by clicking here to start a free, no-strings-attached conversation about your goals and how we can help.
In general, a limited partnership means you have two types of partners – general partners and limited partners.
The general partners control all the management and investment decisions for the assets owned by the partnership, and they carry all of the liability. Typically, in a family limited partnership, the general partners will be the patriarch and matriarch in the family.
Limited partners do not participate in any management of funds, and they have limited liability.
The general partners will contribute assets to the partnership, and then give all or a portion of the interests in those assets to their children or grandchildren. It can go directly to them upon the deaths of the general partners, or be set aside in a trust.
It is in this transfer to the limited partners that the size of your estate will be reduced, and thus your estate taxes as well. Unlike a trust, however, the family limited partnership allows the general partners to retain control over investment decisions, as well as with any distributions.
When the transfer of wealth takes place, the limited partners are eligible for a valuation discount, and this plays a major role in the reduction of taxes owed. This transfer of interest in the partnership effectively reduces three taxes at once – the income, gift, and estate taxes.
The family limited partnership also protects your assets if family circumstances change, so it can be a significant contributor to your estate planning strategies for high net worth.
For instance, if one of your children gets divorced, you can arrange it so their spouse will not be able to access the money owned by the limited partnership. Similarly, creditors cannot get to the money either. An FLP protects your wealth if the family situation turns sour.
The partnership model also makes it easier than a trust to manage your wealth, because all the money can be managed in the same brokerage account. This takes a big bite out of your investment fees. With trusts, you often need to have separate accounts for each trust, and thus more fees.
For All Tax Minimization Strategies
Make every effort to ensure your family is in agreement on whatever you’re planning to do and understands why you’re pursuing your chosen estate planning strategies for high net worth.
Whether forming a private foundation, using life insurance, forming a family limited partnership, starting a trust, or a combination of these, your family needs to be united around the concept and know their roles.
If family discord prevents you from achieving this level of agreement, you may want to seek the help of the various specialists in these fields we’ve been talking about. You can still work out a plan even if you don’t have agreement. The process for navigating that may just be a little less smooth. Thus, creating and maintaining positive family ties should always be an element of your estate planning strategies for high net worth.
Ideally, you will want to have long and detailed conversations with your family and your team of advisors about what will happen to your estate after you’re gone.
If starting a foundation, for instance, everyone in the family should be excited about the idea and about the impact it will have in the world. To reach that point may require a discussion of your values, your passions, and your interests, and those of the other closest people in your family.
Pillar Wealth Management has extensive experience in moderating these sorts of family discussions and we are here to help. You can reach us by dialing 800-669-6780, emailing us at [email protected], or start the conversation online and get the help you need to develop your estate planning strategies for high net worth.
5 Essential Aspects of Estate Planning for High Net Worth Families
- Protection, Protection, Protection
- Securing the Family Legacy through Trusts
- Medical and Disability Directives
- Avoiding Costly and Lengthy Probate
- Estate and Income Tax Minimization or Elimination through Gifting
Hopefully, after reading this article, there is no question in your mind about the urgency of creating estate planning strategies for high net worth to minimize your estate taxes. The question you now face is, how do I go about making that plan with the right strategies?
We are very passionate about this aspect of wealth management. We would be honored and excited to help your family conduct the necessary discussions, develop the estate planning strategies for high net worth to achieve your long-term goals and plans, get your heirs excited, and unify your family around the mission and purpose you’ll be pursuing together, moving forward.
5 Estate Planning Strategies to Start Protecting your Wealth and Your Family
To ensure the smooth transition of your assets to your beneficiaries, you need an estate plan. An estate plan includes a will, but it also defines how your estate will be managed if you become incapacitated. Here are five strategies to get you started.
1. Decide who will carry out your estate plan
Your estate plan outlines your wishes for distributing your assets after you die, including who will execute your plan. In addition to the executor, you may want to appoint a durable power of attorney, who will make decisions on your behalf if you become incapacitated.
You may want to assign someone to act as a health care power of attorney to make medical decisions for you if you are unable to make them yourself. Finally, if you have minor children, you will need to appoint someone to take care of them.
2. Keep your retirement accounts up-to-date
Regardless of the contents of your will, it is the beneficiaries that are named on your retirement accounts that determine how those funds are distributed. So, it’s wise to review your retirement accounts whenever there is a major life event in your family, such as a marriage or divorce, and update the beneficiaries.
3. Get educated about estate taxes
Fortunately, only the wealthy pay the federal estate tax. If the value of your estate is less than $12.06 million, you do not have to pay the federal estate tax, although this limit will revert to its pre-2017 level in 2025, which is $5.49 million for individuals ($6.2 million adjusted for inflation).
Some states and the District of Columbia impose an estate tax.
Some states impose an inheritance tax so that the beneficiary is taxed on the income they receive from the estate (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
This is a tax paid to the state — there is no federal inheritance tax.
4. Remember the gift tax exemption
By making a yearly gift of up to $16,000 per person, which is exempt from taxation, you reduce the taxable portion of your estate. However, the lifetime estate exemption limit is reduced by the value of your gifts.
5. Establish a trust
A will directs the distribution of your assets after your death. It can also direct the executor to create a trust and appoint a trustee to hold assets, for example, until the beneficiaries reach majority or a certain age.
Wills take effect upon death, while a trust can be created during the grantor’s lifetime, making it a “living trust.” Otherwise, it is a “testamentary trust.”
A trust may be revocable, meaning it can be altered or terminated at any time. When a trust is irrevocable, the grantor loses control of any assets transferred to the trust, and the trustee gains control. The assets are no longer part of the estate and will not be subject to estate tax. A trust pays its own taxes. Charitable trusts are irrevocable trusts that benefit charities, but they may allow for estate and gift tax benefits or taxable income for the grantor.
Choose a day and time on our Calendly to chat with CEO and co-founder Hutch Ashoo about how these estate planning strategies for high net worth can help you and your family make the most of your money.
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We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
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