5 Smart Estate Planning Strategies for High-Net-Worth Families

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 current federal 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.

A qualified estate planner in your area can help determine which strategy is best for your circumstances.

Utilizing a 1031 Exchange to Avoid Capital Gains Taxes

If you are planning to leave an investment property to loved ones, a 1031 exchange may be a helpful estate planning tool for you. Because these exchanges allow you to defer taxes or limit taxes owed at the time of a sale, you can use the money that would have been spent on taxes to increase your real estate portfolio, rental income, and personal wealth.

What is a 1031 Exchange?

A 1031 exchange is a process in which you exchange one investment or business property for another, thus deferring capital gains taxes on any profits you make from selling the first investment property. Although you do not avoid capital gains, you can push a significant portion of capital gains taxes owed into the future. However, you must follow specific rules for a sale and purchase to qualify as a 1031 exchange.

Three Requirements

A 1031 exchange will be recognized by the Internal Revenue Service as long as the transaction meets specific criteria:

1. The main requirement is that the exchanged properties are both investment properties, regardless of whether they were the same type of property (for example, an apartment, a building, a multifamily, et cetera). There are also special rules when it comes to vacation homes.

2. Second, money from the sale of the first property must be held by a “qualified intermediary” until the second property is ready to be purchased. A qualified intermediary is a third party that escrows funds until a new property is ready for purchase. You cannot receive funds at any point in the sale of the first property and subsequent purchase of an exchange property. Thus, it is crucial to use a trustworthy and reputable company.

3. Third, the exchange needs to happen within a specific timeframe. You must designate, in writing to the intermediary, properties you’re interested in buying within 45 days of the sale of your first investment property. You then have 180 days to complete the purchase of the exchanged property.

The 1031 exchange process can be done back-to-back without limit on the number of transactions, as long as they are all done correctly. This means that many people can defer capital taxes for very long periods.

When you ultimately decide to sell your exchanged property for cash, you’ll pay taxes at the long-term capital gains rate. That can be much less than other tax rates. For example, in 2022, the tax rate is 0 percent, 15 percent, or 20 percent, depending on a person’s taxable income.

1031 Exchanges and Estate Planning

You may not realize that 1031 exchanges can be a valuable estate planning tool. For example, if you pass away without ever selling your replacement property, your heirs will inherit it at market value. Your loved ones won’t have to pay capital gains taxes on any property value appreciation.

Before determining whether a 1031 exchange is suitable for you, you must consider additional intricacies and rules. If you are considering a 1031 exchange as part of your estate planning process, it is a good idea to speak with an attorney in your area.

If You Don't Want an IRA Distribution, You Can Donate It to Charity and Save on Taxes

Not everyone wants to take the required minimum distributions from their retirement accounts right away. If you don’t want your distribution, one option is to donate it to charity and get a tax deduction. 

You are required to begin taking distributions from your tax-deferred IRA when you reach age 72 (70 ½ if you turned 70 ½ in 2019 or before) even if you don’t need the money. The distributions are added to your income and taxed at your highest marginal rate, perhaps even at a higher rate than your other income if you’re right at the threshold between two rates. You’re more likely to have to pay a higher rate on this income if you are still working. 

If you don’t need the distribution, you may want to consider donating it distribution directly to charity through a qualified charitable donation. By donating your required minimum distribution, the distribution won't be included in your gross income, which means lower taxes overall. 

A qualified charitable donation can also be a good way to get a tax deduction since after the 2017 tax law doubled the standard deduction, itemizing makes sense for many fewer people. If your charitable contributions along with any other itemized deductions are less than $12,950 a year (in 2022), you will no longer get a deduction for your contributions to charity (which can be a disincentive to donate to charity). However, substituting a qualified charitable donation for your required minimum distribution is a way to make a donation and receive a tax benefit from it.

In order for the donation to count as a required minimum distribution, there are a few conditions:

• The donor must be 70 ½ years old.

• There is a $100,000 annual limit on donations.

• The donations may only be made from an IRA or rollover IRA account. Donations from other retirement accounts, such as a 401(k), do not qualify.

• If you donate less than your required minimum distribution, you will need to take the remainder as a distribution.

• The organization receiving the donation must be a qualifying public charity. Donations to private foundations, supporting organizations, trusts established for both charitable and non-charitable purposes, or other funds over which the donor may have some advisory control (including donor advised funds) do not qualify.

• The transfer must be made directly from the IRA account to the qualifying organization. This is ordinarily done by instructing the brokerage firm holding the IRA to make the transfer or by writing a check from the account directly to the charity, if the brokerage firm allows it. If the donor receives the funds from the IRA and then donates them to charity, they will be subject to the income tax.

For more information from the IRS about distributions from IRAs, click here.

Passing Assets to Grandchildren Through a Generation-Skipping Trust

Passing assets to your grandchildren can be a great way to ensure their future is provided for, and a generation-skipping trust can help you accomplish this goal while reducing estate taxes and also providing for your children.  

A generation-skipping trust allows you to “skip” over the generation directly below you and pass your assets to the succeeding generation. While this type of trust is most commonly used for family, you can designate anyone who is at least 37.5 younger than you as the beneficiary (except a spouse or ex-spouse).  

One purpose of a generation-skipping trust is to minimize estate taxes. Estates worth more than $12.06 (in 2022) have to pay a federal estate tax. Twelve states also impose their own estate tax, which in some states applies to smaller estates. When someone passes on an estate to their child and the child then passes the estate to their children, the estate taxes would be assessed twice—each time the estate is passed down. The generation-skipping trust avoids one of these transfers and estate tax assessments. 

While your children cannot touch the assets in the trust, they can receive any income generated by the trust. The trust can also be set up to allow them to have some say in the rights and interests of future beneficiaries. Once your children pass on, the beneficiaries will have access to the assets. 

Note however, that a generation-skipping trust is subject to the generation-skipping transfer (GST) tax. This tax applies to transfers from grandparents to grandchildren, even in a trust. The GST tax has tracked the estate tax rate and exemption amounts, so the current GST exemption amount is $12.06 million (in 2022). If you transfer more than that, the tax rate is 40 percent.  

The trust can be structured to take advantage of the GST tax exemption by transferring assets to the trust that fall under the exemption amount. If the assets increase in value, the proceeds can be allocated to the beneficiaries of the trust. And because the trust is irrevocable, your estate won’t have to pay the GST tax even if the value of the assets increases over the exemption amount. 

Generation-skipping trusts are complicated documents. Consult with your attorney to determine if one would be right for your family. To find an attorney near you, click here. 

How Long Should I Hold on to Important Documents?

It is hard to know what documents to trash and when. Before you know it, your spare room, office, basement, or garage is overflowing with boxes of papers that all seem important. Trying to weed through the mess and figure out what to toss? Keep reading.

Which Documents Should I Keep?

There are some documents that you will want to hang on to forever and some that you should keep for a few years. Consider the following examples:

Documents You Should Always Have

These following documents should always be available, and you should properly store them to ensure you can grab them when you need them:

• Birth certificates

• Death certificates

• Marriage license

• Social Security card (Lost yours? Now you can request a replacement online.)

• Your current insurance policies (life, health, etc.)

• The newest version of your estate planning documents

Documents You Should Only Keep Temporarily

Some documents lose importance as time goes by. However, it would help if you hung on to the following documents for a few years (typically, between five and seven years):

• Papers related to charitable donations

• Tax returns

• Credit card statements

• Cancelled checks

• Bank statements

Why Is It Important to Keep Some Documents?

Should you pass away, it is crucial to have kept certain documents because the probate court may request them after your death. Maintaining important documents will help your family close your estate.

Other reasons to hold on to paperwork depend on your situation. For example, some people find themselves a party to a lawsuit. If that happens to you, you may need to produce documents, and it will be much easier if you can readily access the important ones.

Digital Storage

Digitally storing your documents can significantly cut down on the clutter. Before you start digitizing your essential documents, you want to have a plan. Sit down, look at all your documents, and determine whether they are necessary. Use a critical eye as you decide what to keep. The next step is scanning each document into your computer, on to an external hard drive, or on a flash drive.

Some important considerations when digitizing your files include keeping up to date with current technology and password-protecting your sensitive information. As technology advances, make sure that you advance with it. The last thing you want is to be unable to open your files. Always encrypt or password-protect your information. It is the best way to protect yourself against hackers and identity thieves.

Estate Planning After Divorce

So, you’re officially divorced. In starting this new chapter of life, you should update your estate planning documents as soon as possible. You may no longer be legally married, but divorce does not automatically remove your prior spouse from your will, trust, or beneficiary designations. Here are some items to consider updating:

Change Your Advance Directives

When you engage in estate planning, it is standard to complete forms such as a health care proxy or living will. Often, spouses will choose each other as their agents for making health care decisions if they become incapacitated. After a divorce, your ex may be the last person you want handling these matters. Change your documents to appoint someone you trust.

Update Your Power of Attorney

Another document you may have previously executed is a power of attorney. This can give another person a great deal of control over your assets and personal and financial affairs. If your current power of attorney names your prior spouse as your agent, you can revoke it and sign a new one choosing a different person to act as your agent.

Amend Your Will and Trust

Many couples designate their partner as the executor of their will. Your ex may also be listed as a beneficiary of your will. If you do not want your former spouse to have a say over how your assets are handled or to receive any inheritance, it is important to review and amend your will now to take them out. The same goes for any trust you may have created where your ex is the trustee or a beneficiary.

Guardianship of Your Minor Children

If you have concerns about your prior spouse’s ability to be a guardian to your minor children, there may be steps you can take to mitigate any instability a divorce may have brought to the situation.

One option is to set up a trust for your children that will protect assets from being irresponsibly depleted. Life insurance amounts or other assets placed in a trust will be managed by a person whom you can name as trustee. This will prevent the other parent, who could otherwise be in control of minor children’s finances, from accessing certain funds.

Be Aware of What Insurance You Are Required to Maintain

Many divorce settlements set forth that one spouse maintains life insurance and specifies who shall be a beneficiary of the policy. You should ensure your current life insurance policies not only comply with your divorce agreement, but also are not in danger of lapsing.

The same goes for medical insurance. If you are required to maintain medical insurance in a certain manner, review your plan to ensure the correct parties are covered and that it is in good standing.

Failure to comply with your divorce agreement can cause you to wind up back in court.

Review Your Beneficiary Designations

If you are not required to maintain your ex as a beneficiary on your life insurance or retirement accounts, now is the time to update your designations. You should contact your insurance company or retirement administrator to make these changes. Upon your passing, the funds will go to whomever is listed as a beneficiary, regardless of a divorce proceeding.

Consult a New Estate Planner

The best thing you can do after your divorce is work with an estate planner to review your current documents and update them appropriately. Ideally, this person should have no connection to your prior spouse. Keep a copy of your divorce decree and settlement agreement handy. An estate planner will need to review it to evaluate what you need going forward.

Three Estate Planning Options for Your Art Collection

Collecting art or other valuable items can be a passion for many people. Often such a pastime is more about enjoying the art or the medium itself than about ensuring financial gain. However, once you have accumulated a sizable collection, what do you want to happen to it after you pass away? 

It is important that your estate plan address your art separately from your other assets. 

The first step in estate planning for your collection is to document it. You should not only have the collection appraised, but also take photographs of each item and assemble any paperwork relating to the authenticity and origin of the pieces in your collection, including artist notes, bills of sale, or insurance policies. 

When considering what to do with an art collection, you have three main options: 

• Sell the collection. If your family is not interested in maintaining your collection after you are gone, then you may want to sell it.

If you sell the collection while you are alive, you will have to pay capital gains taxes on the collection’s increase in value since you purchased it. The capital gains tax rate on artwork is 28 percent, compared with the top rate of 20 percent for other assets. 

If the collection is sold after you die, it will be included in your estate, possibly increasing the value of your estate for estate tax purposes, but it will be “stepped up” in value. This means that if your heirs sell the collection, they will have to pay capital gains tax only on the amount by which the pieces have increased in value since your death. 

• Leave the collection to your heirs. You can give your artwork to individual family members, but a better approach may be to put the artwork in a trust or a Limited Liability Company (LLC). The trustee of the trust or manager of the LLC whom you appoint will be responsible for sustaining the collection, including maintaining insurance on the artwork, arranging storage, and making decisions about selling and buying pieces. You can leave instructions for care and handling of the collection. Any profits from the sale of items would be split among the beneficiaries of the trust or members of the LLC.
  

• Donate the collection. You can donate your artwork while you are still alive and receive an income tax deduction based on the value of the items. This can be a good way to pass on your collection while avoiding capital gains taxes. Should you choose to donate through your estate plan, your estate will receive a tax deduction based on the collection’s value.

Deciding which option to take will depend on your circumstances and your family’s interest in the collection. Talk to your attorney to figure out the best option for you.