Estate Planning for High Net Worth Individuals
If you’re a high-net-worth individual, then you have a large estate and wealth that you have spent years building. However, if you don’t pay attention to estate planning, you can end up paying a lot in taxes. In this article, we discuss in detail estate planning for high-net-worth individuals.
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.
If you’re wondering, “Can I do my own estate planning?”, then we would strongly encourage you to seek professional assistance as this is a matter that should only be handled by experts. Pillar Wealth Management can help! Our experienced wealth management professionals specialize in estate planning for investors with $5 million to $500 million in liquid assets. Get a free copy of our book titled7 Secrets To High Net Worth Investment Management, Estate, Tax, and Financial Planning to get more in-depth insight into estate planning.
You can also schedule a free consultation with one of our estate planners and get started with tax planning right away! Keep reading to learn more about estate planning.
Are Estate and Net Worth the Same?
You may be wondering who needs an estate plan and how it’s different from net worth. Well, there is a huge difference between the two. The estate of a person is basically everything that they own, including their net worth, real estate property, cash, financial securities, possessions, and other assets that they own.
On the other hand, the net worth of an individual is a bit more specific. It is the value of their assets after subtracting their liabilities. So, net worth takes into account all their loans and other liabilities.
Let’s learn more!
What are the Essential Components of Estate Planning?
To have an effective estate plan, you need to understand its main components. The estate plan defines what happens to your assets and who can act on your behalf if you are unable to. To ensure that all your wishes are followed, these main components must be a part of your estate plan:
A will is a legal document that defines who will get specific portions of your assets upon your death. This is one of the most critical components of your estate plan. If you pass away without preparing a will, the state will decide how your assets are to be distributed. This procedure can vary from one state to another.An experienced estate attorney can help you draft a Will, and if your liquid assets exceed $10 million in value, be sure to study our $10m guides.
2.Power of Attorney
This document designates someone, such as an adult child or a spouse, to take charge and manage your finances in case you become incapacitated. The person you designate, commonly referred to as your agent, will have decision-making power concerning your finances.
The document is extremely important, regardless of whether you have a family or are a single person with no clearly defined candidate. You have full flexibility to determine how much discretion and guidance to give the designated person in managing your financial affairs. You may even authorize them to nominate a person of your choosing to act as your conservator or guardian when required.
If you fail to designate someone through a power of attorney before passing away, the court will decide who should be appointed to manage your financial affairs.
A trust is a legal entity that acts as a nominal owner with the legal title to the property on behalf of the beneficiaries. The person establishing the trust will decide how and when beneficiaries receive assets in the trust. Typically, assets are exposed to probate, but putting them in the trust can avoid probate.
While there are different types of trusts available, most middle-class families choose living trusts, or revocable trusts. This type allows you to retain control of the assets in the trust so that you can amend or revoke the terms at any point in time. Plus, you can name a trustee to take care of you using your own financial assets. At the same time, you can give the trustee the discretion to take care of your spouse and children during the time you remain incapacitated.
Upon your death, the trustee will provide for your family according to the instructions you placed in your trust. For instance, you can direct the trustee to split the trust among your children and pay for their education accordingly. You can then instruct them to distribute the funds to the children when they reach a certain age.
With an irrevocable trust, on the other hand, the assets in it no longer remain yours. Plus, you can’t make any changes to the terms without the consent of the beneficiaries. The benefit of this option is that any appreciated assets in it aren’t subject to estate taxes. Also, if you want to shield certain assets from your creditors or beneficiaries’ creditors, irrevocable trusts are a perfect choice.
If you want to make specific medical decisions for your health, a healthcare directive is critical. It works similarly to a power of attorney because you designate someone to make medical decisions for you when you’re not able to do so yourself. Again, the type of documents you include as your health directive can vary by state and depend on the local laws. These can include:
A healthcare proxy: This document names the person you choose to make medical decisions on your behalf, should you become terminally ill. It can be your parent, sibling, spouse, adult child, or anyone you deem fit.
A living will: This is a written statement that issues instructions for your healthcare provider that needs to be followed when you become incapacitated. Sometimes, there are disagreements among family members regarding the steps that need to be taken in your care. A living will ensure that you receive treatment as per your wishes.
What are the main steps in estate planning?
If your net worth exceeds $25 million, be sure to read our hardcover book,the Art of Protecting Ultra-High Net Worth Portfolios and Estates: Strategies for Families worth $25 million to $500 million.
Estate planning is a strategic procedure. Take a look at some of the important steps involved in it:
1. Business Succession Planning
If you’re a high-net-worth individual with a business, you may want to pass it on to capable children or grandchildren as part of your estate planning. One of your most critical estate planning strategies is to plan for business succession proactively. If you have a business successor in mind, get them involved in business affairs as early as possible.
This transitional period should span 5 to 10 years, during which your successor can gain hands-on experience, understand day-to-day dealings, and take responsibility for the business. By the end of this period, they should be ready to head your business after your retirement or death and take it to the next level.To learn how to make your business succession a seamless transition, conduct a video meeting with our wealth managers.
2. Life Insurance
Life insurance is a significant consideration in estate planning for high-net-worth individuals, with regards to bequeathing funds or assets to family members and paying estate taxes.
If a substantial portion of your estate is tied up with illiquid assets, such as real estate properties or a business, it will likely owe more in taxes than its liquid net worth. Most of this taxation expense can be covered by a good life insurance policy. This way, your beneficiaries won’t have to sell real estate assets or businesses to pay for the estate taxes.
Life insurance can also help if you’re faced with an even distribution of assets among your beneficiaries. For instance, if you consider one of your multiple children capable of inheriting your high-valued business, your life insurance policy can pay out additional compensation to your other children.
3. Estate Tax Planning
When you build wealth that you will leave to your loved ones, taxes are an important aspect to consider. Not making the right choices in this regard can leave you with a highly depleted estate. This is why minimizing taxes is one of the most important estate planning strategies for high-net-worth individuals. Here are some strategies we recommend.
4. Saving by Gifting
The 2017 Tax Cuts and Jobs Act raised the exemption for a unified credit (the gifts and estate taxes). The exemption for the 2021 tax year is $11.7 million/individual or $23.4 million/per married couple. Anything that exceeds that amount is taxed at 40% of the gift’s value.
You may give $15,000 per person per year tax-free, but if you give $20,000 to a single person in a year, your first $15,000 will be exempt, while the remaining amount will be subject to a gift tax. While these rules apply to estate taxes, the $11.7 million estate tax exemption for 2021 can be reduced by the value of the gifts you give over your lifetime. For example, if you end up giving $4 million worth of gifts using the lifetime gift tax exemption, your tax exemption will be reduced to $7.7 million.
5. Split 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 will 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. Prepare the Next Generation
Estate planning should go beyond ensuring a smooth inheritance process for your estate. It should aim toprotect your wealth and put 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 for your beneficiaries. 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.
Estate planning requires a careful understanding of government regulations and taxation in the context of the wealthy. To protect your wealth, you need to work with experienced professionals who have the expertise required to assist high-profile clients.
The ever-changing industry and tax laws don’t make it easier for individuals to do their own estate planning. At Pillar Wealth Management, our experts take a keen interest in protecting your long- and short-term interests and wealth. We specialize in services for investors from $5 million to $500 million.To talk to a professional estate planner, schedule your first free meeting today!
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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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