How to Avoid Estate Tax to Preserve Your Wealth –PillarWM
As a wealthy individual, you are likely aware of the federal estate taxes that apply to you. If you have over 11.7 million dollars worth of estates, you might be losing a third or even more of your wealth to government taxes. Hence, many rich investors seek out advisors who can tell them how to avoid estate tax. With a net worth of over 10 million dollars in liquid assets, you want to make sure you get advice from the right person. That is why we wrote “The Ultimate Guide to Choosing the Best Financial Advisor for Families worth $5 Million to $500 Million.” It can tell you all you need to know to determine whether your advisor is the best fit for you.
At Pillar Wealth Management, we work with high net worth and ultra-high net worth individuals with 5 million to 500 million dollars in liquid assets to help you meet your financial goals. Our wealth managers understand that your financial picture, aspirations, requirements, standards, and expenses are different from the average investor. Therefore, the strategies used to help you minimize your taxes will be designed especially for your financial profile. If you would like to talk with us in detail about how our tax management and wealth management services can assist you, you can call us to schedule a consultation.
In this article, we will discuss strategies that wealthy families can use to lower their estate taxes legally. Whether you choose to establish a family limited partnership, make charitable donations, or set up an irrevocable life insurance trust, it is better to have a professional to guide you through the process. Before we get right into it, we will discuss what estate tax is and how it works.
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What is Estate Tax and How Does It Work?
Affluent families might have a net worth of millions of dollars, but they are open to many risks that come with a large sum of money. Even taxes can end up taking away a large number of your profits or savings. Therefore, we recommend that you educate yourself about how your wealth is at risk by reading our book,The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 Million To $500 Million. It can give you clarity and insight into making important financial decisions to protect your family’s financial future.
Coming back to estate taxes and how to avoid estate tax, it is worthwhile to know how it works. Estate taxes are paid on the value that exceeds the set exemption limit once the value of your estate has been added together. This means that if you were to total the value of your estate, the amount that exceeded the federal exemption limit would be liable to taxes.
Your estate value comprises all your assets, not only your investments, properties, or cash accounts. This will include any valued items, boats, artifacts, jewels, or other non-cash assets. The total sum of these assets is subtracted by your debts or any outstanding payments to obtain your estate value.
Now, the issue here is that no matter how many millions your estate is worth, not all of it will be liquid, but all of it will be taxed. So, let’s assume your estate values at 25 million dollars, but 21 million dollars are tied in non-liquid assets, such as vehicles or real estate. You are left with 4 million dollars to pay off your taxes. If you’re passing on your estate to beneficiaries, they will be forced to sell off a few assets to pay these taxes.
The federal exemption limit is 11.7 million dollars as of 2021 and will keep increasing as a result of inflation. Your estate is taxed after this amount has been exempted, beginning at 18% and climbing up to 40% for any valued assets above that limit.
We understand that these calculations can be complicated and confusing. Fortunately, our wealth managers are knowledgeable on this topic, particularly how they apply to rich investors. If you want to book a meeting with one of them, feel free to contact us today.
We take a holistic approach to our client’s financial matters, providing you customized solutions and strategies that optimize your financial growth to help you reach your objectives. You can learn more about these strategies in our guide, 5 Critical Shifts for Maximizing Portfolio Growth Strategies – For Families Worth $5 Million To $500 Million.
How to Avoid Estate Tax and Preserve Your Wealth
Tax mitigation needs to be done carefully to ensure that you get the most out of the strategies being used. For high net worth and ultra-high net worth investors with more than 10 million dollars in investable assets, an expert on estate taxes is a reliable option. Whether you choose to hire a financial advisor or a wealth manager, you deserve to work with an advisor who is the best at what they do. Our Ultimate Guide can help you figure what to look for when you’re identifying the right person for the job.
We understand how important it is for you to secure your wealth. That is why we will discuss some of the strategies that we believe can tell you how to avoid estate tax. Using these can potentially help you save tens of millions of dollars.
1. You Can Establish a Family Limited Partnership
One of the ways you can avoid estate tax is to establish a family limited partnership which also works to help you protect your assets. The way you can achieve this is by either starting a new company where you make your children or beneficiaries limited partners or make them partners in your already existing familybusiness.
As a general partner, you get to manage your own investments, but your family members will have a stake in your company. This reduces the size of your estate and ensures that the funds are transferred to your limited partners when you die. This completes the purpose of wealth transfer while saving your heirs from having to pay income, estate, or gift taxes. This is a complicated but powerful strategy that can save you a lot of money if handled by the right team of experts.
2. You Can Set Up an Irrevocable Life Insurance Trust (ILIT)
If you’ve been wondering whether it’s time to set up an irrevocable life insurance trust, you shouldn’t wait any longer. Life insurance proceeds are considered a part of your taxable estate if you die within three years of making the transfer.
With an irrevocable life insurance trust, you transfer ownership to your beneficiary, preventing any future adjustments from being made to it without their consent. This protects your family from bearing the burden of a heavy tax bill because of the benefit.
3. Relocate to an Estate-Tax-Free State
Depending on where you live, state taxes can take up a large chunk of your income. Some states charge taxes on everything from your work and business incomes to your real estate, investment, and dividend growth income. Combined with the federal estate taxes, these can add up to millions of dollars per year.
An expert can tell youhow to avoid estate tax by changing your residency. Moving to a state with no estate taxes might sound simple enough, but it can get you in trouble with the court if you own multiple properties. Hence, we advise that you consult with a professional before you attempt to avoid double taxation by moving to a different state.
4. Distribute Your Wealth Beforehand
Leaving a large inheritance can be counterintuitive if most of that ends up being used to pay off estate taxes. If your end goal here is to provide financial security for your loved ones, there are more effective strategies to help you do that.
Handing off portions of your fortune to your loved ones as gifts can be a tax-free way to pass on your assets. If you’re single, you can give 15000 dollars without any taxes being imposed, and 30000 dollars if you’re married. Giving this money to your heirs will reduce your estate’s value, thereby reducing your estate taxes. However, these gifts will count against the 11.7-million-dollar exemption limit.
Ultra-high net worth individuals may not be able to use this strategy effectively since their net worth can be valued far higher than the exemption limits. You can learn more about gifting and how it affects your estate taxes by contacting our team.
5. Make Charitable Donations
When you use your investments, cash, or assets tomake charitable donations, they are removed from the value of your estate, giving you a tax break. Charitable lead trusts work by passing on your assets to a tax-exempt charity. After your death, the wealth left in that trust can be passed on to your heirs. Charitable trusts are not as easy to set up as they sound. Working with a tax accountant, an estate attorney, and a wealth manager can help you set up a functional trust.
In charitable remainder trusts, a stock or asset is transferred to an irrevocable trust. It continues to accumulate money over time, and can any investment income you have after you die will be donated to charity. This is advantageous since you get a tax deduction while being able to avoid estate taxes and capital gains taxes.
Using any tax reduction strategy requires expert advice to make sure they are implemented correctly and are effective. Wealth managers are well-versed in high net worth tax management and tax deduction strategies. In addition to this, they can also help you grow your wealth by optimizing your portfolio for maximum growth. Want to know how? We talk about this topic in great detail in our Performance Guide.
6. Put Your Money in Donor Advised Funds
A donor-advised fund (DAF) is created solely for the purposed of allowing families, organizations, or individuals to manage their charitable donations. In this account, your investments can grow tax-free since they allow a federal income tax deduction of up to 50%.
The money you put into a DAF is deducted from your estate value, allowing you a tax break. You still have control over which organizations or causes you want to donate your money to. After your death, the duty of managing the account passes onto your heirs.
There are several types of donor-advised funds, such as public foundations, national donor-advised fund organizations, community foundations, and donor-advised funds set up by public charities such as universities or hospitals.
7. Getting Married Can Increase Your Exemption Limit
The federal estate tax exemption is portable between married couples, which means that if a spouse dies without using up their exemption limit, the surviving spouse can add that amount to their individual estate tax exemption.A federal estate tax return (IRS Form 706) needs to be filed after the spouse dies to take advantage of this feature.
An estate tax attorney can help you understand how to avoid estate tax by creating bypass or AB trusts that can save your family millions of dollars. Federal estate taxes can be complicated to understand and work around. That is why we suggest you look for a professional’s assistance. Our Ultimate Guide can help you select the right person for the job!
8. Spend Your Money
The simplest way to bring down your estate value is to spend your assets, and consequently, your estate tax liability. However, this is a luxury that only the rich can afford since only they have enough wealth to live a luxurious life without compromising their future financial stability.
You can give your money away in the form of charity or gifts, or spend it on yourself. Enjoy new experiences, travel more, take advantage of the luxuries you can afford. You’ll be able to reduce your taxes while living your best life.
Since wealthy families only make up a small percentage of the population, not a lot of people will need advice on how to avoid estate tax. This means that there’s only a handful of experts out there too. At Pillar Wealth Management, we have been catering to wealthy families with a net worth of 5 million to 500 million in liquid assets for over sixty years. We understand your concerns and needs. Our wealth managers are knowledgeable about estate tax laws and reduction strategies. You can get in touch with our team by scheduling your first meeting.
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