Although in many situations the advantages outweigh the disadvantages when selecting beneficiaries, there are always exceptions.
If you are a high-net-worth individual, it’s essential to have a comprehensive estate plan in place. However, every family’s circumstances are unique, and there is no one-size-fits-all solution for estate planning.
Below are five estate planning strategies that may be right for you:
1. Make Sure You Have An Estate Plan
For higher-net-worth individuals or families, it is essential to have basic documents in place, such as a will, power of attorney, and advance directives. However, it is equally important to consider whether you need to take additional steps to avoid estate taxes or ensure long-term care, should you need it.
Start planning sooner rather than later. More options are available to you when you have time on your side.
2. Consider Options to Avoid Estate Taxes
There are numerous ways to avoid estate taxes, many of which require you to make an “irrevocable” transfer of your assets. This does not mean you cannot benefit from the income generated by your assets, but rather that you title the assets to a trust managed by someone else.
Here are some examples of options that can help lower your estate taxes and accomplish other goals you may have:
- Charitable Remainder Trusts: These irrevocable trusts can pay you or beneficiaries annual income from assets you donate to the trust. The remainder of the assets will go to one or more charities you designate. They can help you plan for retirement, reduce your taxable estate, and accomplish your philanthropic goals.
- Spousal Lifetime Access Trusts: A spousal lifetime access trust (SLAT) is one way to transfer your wealth to the next generation. In a SLAT, a spouse makes a gift into the trust to benefit the other spouse. As a result, this removes the gifted asset from the spouse’s combined estates.
This allows you to take advantage of the currentfederal lifetime gift and estate tax exclusion (currently $12.06 million per person, or $24.12 million for married couples), which is set to expire in 2026. The spouses can still retain some access to the assets. Any post-gift appreciation in value is excluded from federal taxation for both spouses’ estates. However, federal rules permitting this trust will sunset on December 31, 2025.
- Grantor Retained Annuity Trusts: A Grantor Retained Annuity Trust (GRAT) is a trust through which you may transfer appreciating assets to your heirs and minimize gift or estate taxes. High-net-worth individuals and couples can use GRATs to freeze the worth of their estates and transfer any increase in the value of their assets to their loved ones, all with minimal tax consequences. A GRAT is also another way for you to plan for your retirement.
To establish a GRAT, a donor creates a trust for a certain number of years and, during those years, is paid an income stream or annuity from the GRAT. When the GRAT ends, whatever assets remain will pass to your chosen beneficiaries. If certain conditions are met, you can minimize estate and gift taxes.
3. Engage in Gift Planning
Gifting wealth up to your lifetime exclusion may be a smart estate planning strategy for many high-net-worth families. This allows you to gift up to your lifetime exclusion before your death and not owe any gift tax on gifted amounts until you exceed this threshold.
Based on 2022 gift tax exclusions, a married couple could give away up to $24.12 million without tax consequences. In addition, after they exceed the lifetime amount, they can continue to gift at the annual limit of $16,000 (as of 2022) every year without owing gift taxes.
However, you should gift cautiously while fully informed of your state’s rules. Many states have their own rules regarding gift and estate taxes, which may be incompatible with federal tax rules.
4. Invest in Life Insurance
Another strategy to consider is investing in a good life insurance policy. Life insurance can be used to pay estate taxes and to devise assets or specific amounts to your loved ones.
For example, if a large part of your family’s estate will be illiquid assets, such as real estate or a business, your estate could owe more in taxes than is available to it in liquid funds. Your estate can use the proceeds of a life insurance policy to pay these taxes, so your heirs do not have to sell a family business or investment properties.
You can also use your life insurance policy to “equalize” inheritance. For example, perhaps one child is better suited to run a family business. In this case, you could leave this child your business and another child a life insurance policy equal to the company’s value.
5. Don’t Forget About Portability
Consider whether you may qualify for portability before the current federal estate and gift tax exclusions expire in 2026. If your spouse passed away within the past five years, you might be able to file an estate tax return and transfer their unused estate tax exclusion to yourself. So even if you do not pass away until after 2026, you may be able to add millions in tax exclusions to the benefit of your heirs.
You must follow specific procedures to elect “portability” of your spouse’s unused gift and estate tax exemption, and there are exceptions to which estates may qualify. However, if this is an option in your family’s case, it could result in hundreds of thousands of dollars in tax savings.
Speak With a Professional
In considering all the estate planning strategies available to you, it is important to speak with an experienced estate planner. Keep in mind, too, that when it comes to trusts, each state has its rules and laws that govern which ones are or are not permissible, in addition to varying estate or gift tax rules.
Your estate planner can help determine which strategy is best for your circumstances.