A Guide to High-Net-Worth Estate Planning

Estate planning is a difficult but necessary step if you want to generate wealth for your family. The challenge is the more wealth you have, the more difficult it is to get it right.

Estate planning can be quite complex. To make matters worse, the rules surrounding estate planning are constantly changing. This is especially true of tax laws and liabilities.

The best way to solve this is by implementing estate planning strategically and early on. By acting early, high net worth individuals can leave more for family members and future generations. Let’s look at some of the most crucial steps of good estate planning.

Table of Contents:

• Start with a Will
• Properly Titling Assets in your Estate
• Tax Planning for your Investments
• Estate and Gift Tax Planning
• Making Qualified Charitable Contributions
• Life Insurance for Estate Planning
• Tax Strategies to Avoid 
• Choosing the Right Estate Planning Advisor

Start with a Will

For starters, every estate plan should include a will. It’s one of the most basic components that you can get started with quickly. A will ensures your assets will be distributed according to your wishes. 

Wills should be written in a way that’s consistent with how you allocate assets that pass outside of the will. For example, if your son is a beneficiary for your 401k account, you don’t want your will to mention that your cousin will be a beneficiary instead. This could result in legal challenges for your family, so it’s best to have one written thoroughly by a professional.

Properly Titling Assets in your Estate

Estate planning starts with properly titling your assets. A well-structured estate can provide you with enough access to important assets, while not interfering too much with your broader estate plan.

You can allow certain assets to be directly owned by you and your spouse. However, it’s normally best for HNW individuals to leave other assets outside of their estate, for tax purposes. This is easiest to do with business assets, as well as most investment portfolio items. 

You will have to directly control some parts of your portfolio. Your retirement accounts are one of the clearer examples. However, some assets can be moved outside of your estate. In fact, you should remove anything that you reasonably can from your estate.

For many HNW individuals, taxes can eat up more than 50% of your estate. But these estate taxes only affect assets owned by you directly. Talk to a financial advisor about ways you can strategically reduce the size of your estate.

By reducing the size of your estate this way, the assets that are transferred to your family will land in a lower tax bracket. Typical examples of strategic estate reduction include:

• Re-allocation of assets to family members (e.g. naming beneficiaries on retirement accounts)
• Creating new trusts
• Strategic, qualifying gifts (Many gifts are tax-free)
• Paying for certain expenses, such as family members’ education expenses
• Qualifying donations
• Non-grantor trusts for federal and state income tax shielding

Tax Preparations for your Investments

Investments are normally intended to maximize long-term wealth. But each investment can have different tax implications. When you sell your investments at a profit, a taxable event is immediately triggered. Capital gains taxes will be levied on those profits. But there are two kinds of capital gains tax.

Short-term capital gains tax is applied to gains from investments held for less than one year. These gains will be taxed at the same rate as ordinary income tax rates. Long-term capital gains tax is applied to gains from investments held for over one year. There are three tax brackets for long-term capital gains tax. For the tax year of 2020 those brackets were:

• 0% on up to $40,000 of capital gains
• 15% on capital gains between $40,001 and $248,300
• 20% on capital gains over $248,301 

If your investment income is higher, you’ll normally pay in short-term capital gains tax. So, consider the tax implications of when you sell your investments.

Estate and Gift Tax Planning

You can send tax-free gifts, but you need to pay attention to the Lifetime Tax-Free Gift Exemption. For HNW individuals, the 2018 tax plan brought a few changes to estate and gift taxes. Namely, Trump’s tax plan doubled tax exemptions for:

• Gift tax
• Estate tax
• Generation-skipping transfer

For 2021, the estate tax exemption is $11.7 million per person and the gift tax annual exclusion limit is $15,000 per person. Your financial advisor can help you leverage these exemption tax limits while they are in place. Going forward, tailor your estate plan to any changes to state and federal estate taxes.

Making Qualified Charitable Contributions

Qualified charitable donations can be an impactful aspect of estate planning. They simultaneously reduce the size of your estate while ensuring your funds go to the recipient almost (and often completely) tax-free.

IRA owners who are 70 ½ years old or older can make these qualified charitable contributions. But the contribution must be made directly to a non-profit organization.

For married couples, each spouse can donate up to $100,000 per year from their IRAs. That means if you and your spouse each have a personal IRA, you can make a maximum contribution of $200,000 per year.

Life Insurance

HNW individuals can make great use of life insurance as a part of estate planning. They allow you to send wealth to family and/or charities, increasing the amount you can pass on tax-free.

You pay a relatively small amount to receive a large payout. When taxes are taken into account, you still end up giving the beneficiary more than the amount paid into your policy. You should speak with a life insurance expert. They will know the best ways for you to maximize the benefits to your estate and family. 

Go here for info on: Grantor Trusts.

Tax Strategies to Avoid 

While the strategies we’ve gone over can work very well, you may also stumble upon some dangerous “advice” while looking for estate planning help. The point of employing estate planning strategies is to legally and ethically pass on more of your wealth.

There is a fine line between legal tax minimization and illegal tax avoidance. The latter is likely to get you into a lot of trouble with the IRS. This can potentially mean two things for you:

1. IRS penalties that, ironically, reduce the share of your wealth that you can pass on
2. In some particularly bad cases, criminal charges

If you read advice that sounds like it can be illegal, ignore it. For example, “strategies” for under-reporting income are tantamount to encouraging tax evasion, which is a serious felony. The same can be said of advice that leads you to claim deductions that you’re not truly entitled to.

It’s always best to stay safe and consult professionals for legal and ethical ways to minimize taxes and maximize what you leave behind.

Choosing the Right Planning Advisor

To implement any of the ideas we’ve discussed, it’s best to talk with an estate planning advisor. Make sure you hire a professional with whom you are compatible and who understands your needs. 

Some estate planning professionals may not always act in their clients’ best interests. So, do your research and find someone who will work for you, not just with you.

Finding the right advisor is worth the effort. So, take the time to read reviews, check accreditations, and discuss your needs with prospective professionals. Then, you can be comfortable discussing your estate planning needs, and you can maximize your ability to pass on your assets.