Avoiding Estate Tax — Tips from PillarWM Experts
Often, high and ultra-high net worth individuals have to deal with regularly changing estate tax laws that make it difficult to avoid estate tax. However, there are several strategies that you can use for avoiding estate tax or at least minimizing the tax percentage imposed on your estate.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
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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 could lose out on a significant percentage of your wealth after you pass away. If you want to learn the details of managing your wealth and planning for estate taxes, we highly recommend acquiring a free copy of our book 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.
At Pillar Wealth Management, our expert wealth managers and other estate professionals can help you plan for minimal estate taxes. To avoid estate tax, you need to have a comprehensive estate planning strategy that takes into account tax laws, liabilities, and other factors that could cause problems for your family in the future. Visit our website to schedule a meeting with one of our wealth managers at no cost.Now, let’s learn more about how you can minimize estate taxes!
Table of Contents
- How do Billionaires Avoid Estate Taxes?
- 1. Billionaires Establish Trust Funds
- 2. Billionaires Move to States with No Estate Tax
- 3. Billionaires Use Life Insurance Benefit to Pay Estate Tax
- 4. Billionaires Set up Irrevocable Life Insurance Trusts (ILIT)
- 5. Billionaires Divide Family Income
- 6. Billionaires Establish Donor-Advised Funds
- 7. Billionaires Train Their Heirs to be Responsible
- 8. Billionaires Invest in Businesses to Give Co-Ownership to their Heirs
- Are There Any Cases where Inheritance Tax can be Exempted?
- Final Thoughts
How do Billionaires Avoid Estate Taxes?
If you’re searching for ways to avoid estate tax completely, then that may not be possible. However, there are several strategies for minimizing estate tax significantly, and you may be wondering, “How can I avoid inheritance tax legally?” We have the answers for you. Keep reading to understand how it all works.
The federal government charges a tax of 40% of the value of all assets in the wealth transfer category. Additionally, your state may also tax your wealth, so you need check 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.
If you want to learn about the key strategies that billionaires implement to avoid taxes or minimize them significantly, read on.
1. Billionaires Establish Trust Funds
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 a 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 a 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 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 madeto protect your wealth and estate.
2. Billionaires Move to States with No Estate Tax
Another way to avoid estate taxes imposed by a state is to move your home to a state that doesn’t impose them. This may be your best option. This way, you can avoid paying additional estate tax without much trouble.
However, there is one thing that you must be careful of if you own properties in multiple locations. Your residency status depends on a lot of factors, and if you’re not careful and fully aware of the regulations, you can find yourself in court for tax evasion, which is why you must have professional wealth managers and estate planners to consult with on these matters.
3. Billionaires Use Life Insurance Benefit to Pay Estate Tax
One of the things that we highly recommend doing early on in life is to buy a life insurance policy with a death benefit amount that covers 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 tax, it helps your heirs pay for it without loss.
To know more about wealth and estate management, get your hands on the free copy of our book 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.
4. Billionaires Set up Irrevocable Life Insurance Trusts (ILIT)
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 due to the death benefit. Creating an ILIT is a strategic way to avoid estate taxes as you’ll be protecting your wealth from being reduced due to federal taxes. Visit our website to schedule a meeting with one of our best wealth managers at no cost.
5. Billionaires Divide 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 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 who helps you further minimize the tax burden.
6. Billionaires Establish 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 for the same fund.
When money is put into a donor advised fund, your estate’s value is reduced by that amount, 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.
7. Billionaires Train Their Heirs to be Responsible
Estate planning should go beyond ensuring a safe inheritance process for your estate. It should be aimed at protecting your wealth and putting it to good use for generations to come. 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. Taking these steps can create a sense of responsibility among 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.
8. Billionaires Invest in Businesses to Give Co-Ownership to their Heirs
Although this option is not a certain or instant solution to the estate tax problem, 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.
Are There Any Cases where Inheritance Tax can be Exempted?
One of the major rules of inheritance or estate tax is the 7-year rule. If you are alive for longer than seven years after giving any gifts, no tax will be due on them unless the gift is already a part of a trust. This simple regulation is known as the 7-year rule in inheritance tax.
This 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 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, and gift paintings that still hang in your house.
It is very important that you keep a record of all the gifts that you have given because this will make it easier for your estate manager to categorize your gifts 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.
Avoiding estate taxes entirely may not be possible, but you can significantly bring down the amount you have to pay if you’re strategic about your wealth, estate, and tax planning.
The federal government can impose taxes of as much as 40% of the worth of all your assets, which is why you must be proactive about protecting your wealth and ensuring that your children receive full benefits. 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.
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.
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