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Your Poor Planning Could Make Uncle Sam Your Biggest Heir

Did you know that without proper planning, a $15-million estate can lose about $7.5 million to estate taxes, leaving the heirs to split the other $7.5 million? Instead, why not give your entire estate away twice – first to a charity, then to your heirs.

What is wealth management all about if not efficiently transferring the most you can to your heirs? What we described above uses a little-known strategy of obtaining a tax-deductible $15 million life insurance policy by donating the premium to your own charitable foundation. The tax savings of approximately 50 percent are gifted to your heirs or an irrevocable trust to purchase a $7.5 million last-to die or individual policy for your heirs. After your death, your beneficiaries receive $7.5 million from the estate after taxes and $7.5 million tax-free from the proceeds of the life insurance policy.

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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 a high net-worth individual who believes a living trust is all you need, here are some tax-saving techniques you might want to contemplate. But, keep in mind if you’re net worth is under $5 million, this stuff isn’t for you.

  • Avoiding a fire sale on your business: If you don’t want your heirs to have to liquidate a business or sell assets to pay estate taxes, consider a wealth replacement trust. A businesswoman with a $22-million company, a $3-million retirement plan, and a $2-million home could lose well over 50 percent of her net worth to estate taxes and income taxes. A large chunk of those taxes is due soon after death. If the beneficiaries wanted to hold onto the business and the home, they would need to come up with well over $13 million to pay the taxes. Without a wealth replacement trust to pay those taxes, they may be forced to give up the business through a fire sale.
  • Avoiding capital gains taxes on appreciated assets: If you have a huge investment portfolio, you’re likely to come across the capital gains tax.  Lower long-term capital gains apply to investments that you hold for over a year, and the higher short-term capital gain tax applies to investments that you hold for less than a year. Would you like to sell a highly appreciated asset, such as a stock or real estate, and avoid capital gains taxes, receive a tax deduction, and get an income for life? We had a client who received at a startup’s stock for 17 cents per share. Within three years, the stock was worth $71 per share after splits. When it was time to retire, her wealth was concentrated in that stock, which paid no income. We set her up in a charitable remainder trust and gifted her stock to the trust. The trust, in turn, sold the stock and, as a charity, avoided capital gains taxes. She is now receiving a guaranteed income for as long as there is money in the trust. 

By gifting the stock to the charitable trust, her estate was reduced by the value of the stock thus reducing future estate taxes. And, gifting the stock to a charity gave her a deduction on her income taxes. The con to a charitable remainder trust was convincing the heirs to go along with the concept because assets gifted to the trust will go to the charity upon her death. Our client got around this by establishing a wealth replacement trust to replace the gifted assets to the heirs tax-free. Donating part of your wealth can result in a tax deduction. In 2018, the deduction limit for cash contributions to charities increased from 50% to 60% of adjusted gross income. The act also removed the Pease limitations hat capped the number of charitable deductions that were available to high-income taxpayers.  Anyone over the age of 70 can avoid paying income tax on up to $100,000 in charitable donations that you make from a traditional IRA annually for an extra tax benefit.  You can also get an upfront tax deduction by donating to a donor-advised fund. These changes are expected to expire at the end of 2021, which is why you need to capitalize on them sooner instead of later.

  • Taxes on large IRAs: If your estate is worth more than $5 million, your maximum estate tax is 47 percent. Upon your death, your retirement accounts, 401K accounts, IRAs, or other accounts, will need to be distributed to your heirs and will be taxed at their income tax bracket. If the heirs are employed, they could lose another 40 percent or more of these dollars due to income taxes. In the end, you could lose 70 percent of your retirement account assets to Uncle Sam. Through proper beneficiary designations as well as charitable gifting strategies, this problem can be tackled.
  • Deducting Pass-Through Entity Income: As a high net worth individual, you need to consider the new 20% deduction on business income for pass-through entities.  You can deduct 20% of your qualified business income if you run a business that’s taxed as a pass-through entity. High-income earners with businesses can form an LLC to explore the advantages of this deduction.  Businesses running as a C-Corporation aren’t eligible for this deduction, but you get a corporate tax rate deduction from 35%-21%.  That helps you save on taxes. A financial advisor in Naples Florida can help you navigate through this process. 
  • Additional tax-saving techniques: Supporting organizations, limited family partnerships, and institutional guarantee installment sales are just a few other techniques that can help you accomplish your goals related to philanthropy, tax deferral, estate tax reduction, creditor protection or spousal protection, and much more.

The bottom line is taxes and tax strategies are complex. Too many wealthy individuals and business owners think they are well protected because they set up a living trust 10 years ago with their attorney.

Well, if you’re worth more than $5 million, it’s probably time for you to go beyond the living trust. Talk to one of our financial advisors across the US to learn more about tax-saving strategies. 

Christopher G. Snyder and Haitham “Hutch” E. Ashoo are principals of Pillar Financial Services in Walnut Creek. Contact them at 800.669.6780