How To Avoid Estate Taxes – Tips from Pillar Wealth Management
High and ultra-high net worth individuals need to learn how to avoid estate taxes because if they don’t, their families can lose a huge chunk of their wealth. It is natural to be concerned about regularly changing estate tax laws that make it difficult to avoid estate tax. However, there are several estate planning strategies that can be used to reduce estate taxes that a professional wealth manager can advise you on. If you want to learn more about managing your wealth and planning estate taxes, we highly recommend accessing a free copy of our book 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
Table of Contents
Estate taxes determine how much worth and assets a person can leave behind for their family and heirs. If you don’t have a comprehensive estate tax strategy in place, your heirs can lose out on a significant percentage of your wealth after you pass away. Many high net worth individuals have pushed for lenient policies, and some have even discussed the question, “Should estate tax be eliminated?“
To manage your estate taxes, you need to have a comprehensive estate planning strategy that accounts for tax laws, liabilities, and other aspects that might cause problems for your family in the future. At Pillar Wealth Management, our expert wealth managers and other estate professionals can help you plan for minimal estate taxes. Visit our website to schedule a meeting with one of our best wealth managers at no cost.Now, let’s learn more about how you can minimize estate taxes!
What is the 2021 Estate Tax Rate?
The federal government charges a tax of 40% of the value of everything in the wealth transfer category. Additionally, your state may also tax your wealth further, so you need to make sure that you are aware of your state’s current tax regulations.
For 2021, there is an exemption of $11.7 million for an individual and $23.4 million for a married couple. This means that an amount below these numbers will not be taxed, and anything exceeding the exemption limit will be imposed with a 40% federal tax of the estate value.
How do Trusts Avoid Taxes?
If you follow news related to billionaires and high net worth individuals, you may have noticed that they all run some kind of trust. So, the question is, “Do trusts help avoid estate taxes?“ The answer is yes, they do. A highly effective method of preserving your wealth is to establish trust. You can assign a portion of your wealth to charitable trusts of two types: lead trusts and remainder trusts. Your estate, such as investments, hard assets, and even cash, can be allocated to trust in the form of charitable donations. Most billionaires and ultra-rich individuals use this strategy for tax planning. Access our Financial Advisor Guide to help you choose the right wealth manager for you.
For example, if you own a property and you assign it to a trust, the proceeds of its sale will go into the trust when you sell it instead of counting towards your estate. Consider speaking to a wealth management or estate planning professional for advice on starting a trust fund. To set up a trust, make sure you hire a team of professionals, which includes an estate attorney, tax accountant, and wealth manager, to ensure that the best decisions are made to protect your wealth and estate.
Strategies for Reducing Estate Taxes
If you’re searching for ways to avoid estate tax entirely, then that will not be possible. However, there are several strategies for minimizing estate tax significantly. So, you might be wondering, “How do the ultra-wealthy avoid estate taxes?“ We have the answers for you. Keep reading to understand how it all works.
1. Move to a State that Does Not Impose Estate Tax
An excellent way to reduce estate taxes imposed by a state is to move to a state that doesn’t impose them. Thismay be your best option to avoid paying additional estate tax.
However, there is one thing that you must be careful of if you own property in multiple locations. Your residency status depends on a lot of factors, and if you’re not careful and fully aware of regulations, you can find yourself in court for tax evasion, which is why it is essential to have professional wealth managers and estate planners to consult with on these matters.
2. Setting Up Irrevocable Life Insurance Trusts (ILTI)
Investing in an irrevocable life insurance trust means that if one of the spouses dies, the partner stays protected from having to pay a large sum in estate tax bills due to the death benefit. The ILIT is a strategic way to avoid estate taxes as you’ll be protecting your wealth from being reduced to a smaller amount due to federal taxes. Visit our website to schedule a meeting with one of our wealth managers at no cost.
3. Splitting Family Income
Another great way to minimize your high-net-worth tax burden is to split your high net worth among your family members. As per the structure of the US tax system, high-income earners must pay higher taxes. The family’s overall tax burden should be significantly reduced if you divide the wealth among the low-income earners of your family. You could end up saving thousands of dollars this way.
While these were some effective strategies to minimize the tax you pay on your hard-earned wealth, nothing beats the power of expert advice. Use our Financial Advisor Guide to choose the best wealth manager to help you further minimize the tax burden.
4. Pay with Life Insurance Benefits
One of the things that we highly recommend doing early on is to buy a life insurance policy with a death benefit amount that can cover most of the estate tax that is likely to be imposed on your estate. This strategy is simple yet effective. Your heirs will be able to pay estate taxes without dealing with major cuts in their inheritance. Although using this strategy doesn’t avoid estate tax, it helps your heirs pay for it without loss. To know more about wealth and estate management, get your hands on a free copy of our book 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.
5. Donor-Advised Funds
A Donor Advised Fund is similar to a health savings account. It is a dedicated account for your investments to grow without taxation. The purpose of the fund is to donate money to charity. However, you still have control over the amount and where it goes. In the future, your heirs will be transferred the managing rights of the same fund.
When any amount of money is put into a donoradvised fund, it is removed from your estate’s value, which means that you will get a good tax break in the years to come. You can learn more about estate taxes by requesting a free copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning.
6. Preparing Your Heirs
Estate planning should go beyond ensuring a safe inheritance process of your estate. It should be aimed at keeping your wealth protected and putting it to good use for generations to come. To be able to achieve this, you should also focus on instilling a sense of financial responsibility in your heirs.
An experienced wealth manager can help you coordinate revocable trusts with age-banded withdrawals, manage cash transfers, and structure access to funds during their youth. These actions can instill a sense of responsibility in your children and grandchildren while also protecting and preserving their wealth. Read our Free Book titled Five Critical Shifts for Maximizing Portfolio Growth Strategies For Families Worth $5 Million to $500 Million. Then, recommend this book to your children and grandchildren.
7. Investing in a Startup
Although this option is not a certain or instant solution to the estate tax issue, it still allows you to reduce the value of your estate while offering a high potential for long-term success. You can securely transfer your wealth to your heirs by investing in a business or startup that they co-own. You can either start your own business or invest in a startup with an arrangement that gives your heirs co-ownership.
To get a deeper insight into how to protect your wealth and the importance of risk management, get a free hardcover copy of our book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 Million To $500 Million.
What is the 7-year Tax Rule?
Another helpful inheritance or estate tax law to keep in mind is the 7-year rule. If you are alive for longer than seven years after giving a gift, no tax will be due on it, except if the gift is already a part of a trust. This simple regulation is known as the 7-year rule in inheritance tax.
It means that the earlier you start planning your estate and strategizing estate tax, the better. If you don’t live past the seven years of giving a gift, an inheritance tax is going to apply to it based on the time you gave the gift.
For instance, gifts that are given within three years before a person’s death are imposed a 40% tax. The gifts that you gave between 3 and 7 years before your death are taxed based on a “taper relief,“ which is a sliding scale. There is also an estate tax imposition on gifts with reservations. These are the gifts that you gave away but still benefit from in some way. Examples of gifts with reservation include homes that you give as gifts but still live in, caravans you continue to use for free regularly, gift paintings that still hang in your house, and so on.
It is very important that you keep a record of all the gifts that you have given, which will make it easier for your estate manager to categorize them based on how many years prior to your death they were given. Make sure your record has information on what gift you gave, its value when you gave it, and to whom it was given.
Pillar Wealth Management offers the services of qualified and experienced asset and wealth managers who can advise you on tax strategies to protect your estate. They will discuss your priorities and short- and long-term financial goals with you to devise a strategy. We also incorporate management tools that predict how well your financial plan aligns with your goals.
If you’re a high or ultra-high net worth individual, then you need to be proactive about protecting your estate because the federal government can impose taxes as much as 40% worth of all your assets, while you want to ensure that your children receive full benefits. By implementing the strategies that we discussed above, you can plan your estate taxes efficiently. Get in touch with our team for a free first appointment with a professional and find out more about how we can help you with wealth and investment management.
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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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