4 Estate Planning Tips for High-Net-Worth Families
Like many financial planning strategies, estate planning becomes more complex for high-net-worth families. If not properly managed, your estate can lead to significant tax consequences for your heirs.
Following are four tax-efficient planning strategies you should consider.
#1 – Make gifts throughout your lifetime.
Making financial gifts throughout your lifetime can help lower your loved ones’ estate tax liabilities while giving you an opportunity to see the impact of your gifts while you’re still alive. Also, financial gifts can be more impactful for your heirs when received earlier in life. For example, helping your daughter with a down payment on a house when she’s in her 20s or 30s can set her up for financial success throughout her lifetime, while giving her the same sum of money when she’s in her 60s may not have the same financial impact.
The IRS allows a certain amount of assets to pass to an individual’s heirs free from estate and gift taxes. In 2024, the federal estate tax and gift tax exemption is quite high, at $13.61 million for single filers or $27.22 million for married couples filing jointly. That means as long as your estate is valued at less than the exclusion amount, your heirs won’t be subject to federal estate taxes.
However, this high exemption amount is set to expire on January 1, 2026, when provisions of the Tax Cuts and Jobs Act of 2017 expire. Unless Congress takes action in the meantime, the exclusion amount will decrease dramatically to an estimated $5 million per person or $10 million per married couple, indexed for inflation. If your total assets are greater than $5 million, giving to loved ones throughout your lifetime can help maximize your gifting power and drastically reduce your heirs’ estate tax exposure.
In 2024, the IRS allows each individual taxpayer to give up to $18,000 per person per year as a direct gift without incurring gift tax. This amount isn’t counted toward your lifetime exclusion amount. If you’re married, your spouse can give another $18,000, doubling the amount you can give to any one person to $36,000 per year. The annual exclusion is per recipient, so a married couple can give $36,000 to a child, $36,000 to a friend and $36,000 to a sibling, for example. This is a simple way to reduce the taxable assets held in your estate without reducing your lifetime exclusion amount.
#2 – Establish a trust.
One of the most effective ways to effectively manage a large estate is by establishing a trust. Trusts provide you with greater control and flexibility over your assets because they specify exactly how and when assets will be distributed to your beneficiaries. They also allow assets to pass directly to your loved ones without being subject to probate.
Your wealth manager and estate planning attorney can help you establish the type of trust that makes sense given your personal financial situation, which may include one of the following:
- Revocable trust – Often referred to as a living trust, this type of trust allows the grantor to retain control over trust assets. The grantor can change the terms of the trust at any time, including making changes to the trust’s beneficiaries, modifying how assets are distributed and even terminating the trust all together.
- Irrevocable trust – An irrevocable trust can’t be modified or terminated by the grantor once it’s established. The grantor gives up control of the trust’s assets, and the terms of the trust typically can’t be changed without the consent of all beneficiaries.
- Intentionally defective grantor trust (IDGT) – An IDGT allows the grantor to separate certain assets for federal income tax purposes, facilitating the tax-exempt transfer of wealth to the grantor’s heirs. Because the grantor intentionally claims ownership of the trust, he/she is responsible for paying taxes on the trust’s income. However, any appreciation within the trust is excluded from the grantor’s assets for estate planning purposes. This practice can help maximize the amount received by trust beneficiaries.
Using this strategy, the grantor places assets into an irrevocable trust, either as a gift or asset sale. If the transaction is considered a “sale,” the grantor receives a promissory note with an associated interest rate. The trust would then pay out an established interest rate over the term of the loan, and the grantor must pay taxes on any interest received. The goal is for the trust’s assets to grow at a rate that exceeds the amount paid in interest. This type of trust is referred to as “defective” because the grantor retains ownership and control of the trust’s assets for income tax purposes.
- Charitable remainder trust – A charitable remainder trust is an irrevocable, tax-exempt trust with an income beneficiary during life and a charitable beneficiary upon death. The income beneficiary receives an annual income from the trust and the charitable organization receives the remaining balance after the donor dies. This strategy excludes the charitable donation from the donor’s taxable estate.
- Special needs trust – A special needs trust can provide financial support for an individual with special needs, without disqualifying them from government benefits, such as Medicaid and Supplemental Security Income (SSI).
This type of trust is managed by a trustee who’s responsible for investing and distributing assets according to the terms of the trust document. The trust’s beneficiary has no control over assets within the trust, and the trustee is held to strict guidelines that help ensure the trust is used solely for the beneficiary’s benefit.
#3 – Consolidate your assets.
Many families find that as their wealth grows, so do their number of investment accounts, real estate holdings and other assets. One way to improve efficiencies across your entire estate is by consolidating your assets into fewer accounts. Streamlining your assets can make it easier to gain a clear view of what you own, which can help mitigate your estate tax liabilities, minimize conflicts among your heirs and lead to a more streamlined transfer of wealth.
#4 – Use life insurance.
If you own a business, real estate and/or illiquid investments, your estate may be subject to significant taxes following your death. When properly structured, the payout from a life insurance policy can help your loved ones cover their estate tax liabilities without needing to liquidate assets at an inopportune time.
Using an irrevocable life insurance trust (ILIT) to hold your life insurance policy can add another level of protection for your business partners or family beneficiaries while also streamlining the management and distribution of life insurance proceeds following your death. Assets passed along through an ILIT are free from federal estate tax and aren’t counted toward your lifetime exclusion amount.
Could you use some help implementing estate planning strategies for your large estate? Creative Planning is here for you. Our in-house teams of advisors, estate planning attorneys and insurance professionals works together to support our clients’ wealth and estate planning needs. For help getting started, schedule a call with a member of our team.
