Tax-Efficient Estate Planning for High-Net-Worth Individuals

Maximize wealth and secure assets with tax-efficient estate planning for high-net-worth individuals.
Picture of Scott Hohman, CFP®, AIF®

Scott Hohman, CFP®, AIF®

Estate planning can be a difficult topic to navigate. This is true not only because of the complex laws and regulations surrounding the processes, but also because of all the emotions that are tied into thinking about the end of your life. However, it’s an area that requires attention if you want to be sure your assets will be distributed according to your wishes. The stakes can feel even higher when you’re a high-net-worth individual with significant assets because you’ll also want to carefully consider a tax-efficient estate planning strategy that leaves your heirs with as small a tax burden as possible. Tax-efficient estate planning involves utilizing legal strategies and tools to reduce the amount of tax payable on an individual’s estate, and we’ll discuss some of these strategies below.

Tax-Efficient Estate Planning: Reduce Your Estate by Making Gifts

One of the simplest ways to reduce your estate tax liability is to gift assets to your heirs while you’re still alive. The IRS allows individuals to gift up to $17,000 per year to an individual without triggering gift tax. This means if you have four children, you can gift each one $17,000 each year, reducing the value of your estate by $68,000 each year. Over time, these gifts can add up, significantly reducing the value of your estate, and hence, the tax you will owe on it.

Additionally, gifts can be made to charities, which not only provide tax benefits but also support a worthy cause. Donating assets to charity can result in an immediate tax deduction, reducing your taxable estate in the present.

Tax-Efficient Estate Planning: Create a Trust

Another tax-efficient estate planning strategy is to create a trust. A trust is a legal entity that allows assets to be managed and distributed according to the instructions of the trust’s creator. By creating a trust, an individual can reduce their estate’s value by transferring assets to the trust, effectively removing them from their taxable estate.

Trusts come in different forms, and they can be tailored to suit an individual’s specific needs. For example, a revocable trust allows the creator to retain control of the assets while alive and designate how they are distributed after their death. An irrevocable trust, on the other hand, cannot be changed once it is created and provides more significant tax benefits, including estate tax savings and protection from creditors.

SEE ALSO: 5 Reasons Charitable Giving is Good for You


Tax-Efficient Estate Planning: Utilize Life Insurance

Life insurance is a powerful tool that can be used to provide financial security for your loved ones after your death while also minimizing your estate tax liability. Life insurance proceeds are generally paid out tax-free to the beneficiary, providing an excellent source of tax-free income.

Additionally, individuals can use life insurance to pay estate taxes, ensuring that their heirs do not have to sell assets to pay estate taxes. For example, a high-net-worth individual may purchase a life insurance policy equal to the amount of estate taxes they expect to owe. The proceeds from the policy can then be used to pay the estate taxes, ensuring that the estate remains intact and reducing the overall tax burden.

Tax-Efficient Estate Planning: Maximize Your Retirement Accounts

Retirement accounts such as 401(k)s and IRAs are excellent, tax-efficient estate planning tools. By maximizing contributions to these accounts, individuals can reduce the value of their taxable estate while also providing for their retirement. Contributions to retirement accounts are tax-deductible, reducing the individual’s taxable income, and the investment growth is tax-deferred until withdrawal, providing further tax benefits.

Additionally, by designating beneficiaries for retirement accounts, individuals can ensure that their assets pass to their heirs outside of the probate process, avoiding potential delays and costs.

Tax-Efficient Estate Planning: Use Family Limited Partnerships

Family limited partnerships (FLPs) are a popular estate planning tool for high-net-worth individuals interested in tax-efficient estate planning. An FLP is a partnership in which the family members own limited partnership interests, and a general partner manages the partnership. The general partner typically holds a small percentage of the partnership interests and has control over the partnership’s assets.

By transferring assets to an FLP, high-net-worth individuals can effectively reduce the value of their taxable estate by taking advantage of valuation discounts for the limited partnership interests. The discounts are based on the fact that the limited partners do not have control over the partnership assets, making the interests less valuable. The result is a lower taxable value for the estate.

Additionally, FLPs can provide asset protection benefits by shielding the partnership assets from creditors’ claims. They also allow for flexible distribution of income and capital gains among the family members, enabling efficient tax planning.

SEE ALSO: Multigenerational Wealth Planning: Tips to Prepare Your Heirs for an Inheritance


Tax-Efficient Estate Planning: Consider Charitable Trusts

Charitable trusts are another tax-efficient estate planning strategy that high-net-worth individuals can use to reduce their taxable estate. A charitable remainder trust (CRT) allows an individual to transfer assets to a trust, with the income from the trust paid to the individual or their beneficiaries for a set period. After the trust’s term expires, the remaining assets are transferred to a designated charity.

CRTs provide tax benefits in the form of an immediate tax deduction for the charitable contribution and a reduction in the taxable estate. The individual or beneficiaries also receive a stream of income from the trust for a set period, providing financial security.

Make Tax-Efficient Estate Planning Part of Your Wealth Management Strategy

Tax-efficient estate planning is critical for high-net-worth individuals who want to minimize their tax obligations and ensure their assets are distributed according to their wishes after death. Utilizing legal strategies and tools such as gifting, trusts, life insurance, retirement accounts, family limited partnerships, and charitable trusts can help reduce the value of a taxable estate while providing financial security for loved ones.

It is crucial to work with an experienced estate planning attorney and financial planner to develop a comprehensive estate plan that incorporates tax-efficient strategies. At Resolute Wealth Advisor, our services focus on comprehensive wealth planning for individuals and their families with an emphasis on multi-generational wealth. If you’d like to begin a conversation with one of our advisors on how to develop a tax-efficient estate plan that works for your unique financial situation, give us a call today. We look forward to hearing from you.

The views expressed represent the opinion of Resolute Wealth Advisor, Inc. (RWA). The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While RWA believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the RWA’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

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