Estate Planning for the High Net Worth

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®
Affluent Florida residents live in Florida for a reason – and it’s not just the beautiful weather, endless beaches, and warm atmosphere. Florida also is particularly benevolent to high-net-worth individuals for its approach to taxation – or lack thereof – making it an ideal state for estate planning.
In Florida, we recognize that after dedicating a lifetime into building your wealth, you don’t want it to simply vanish once you’re gone. Instead, you desire to leave a lasting legacy and provide your descendants with an even brighter future than the one you had. After all, that’s the essence of life’s journey, isn’t it?
While living in Florida or other states with low or no wealth transfer taxes is beneficial to maintaining your legacy, you have to remember that the federal government wants its piece of the pie, and it is a big chunk if you don’t have a comprehensive estate plan in place.
The good news is that tax mitigation tools and strategies are abundant. When executed skillfully, these tactics can significantly reduce the tax burden for you and your family.

Proper Estate Planning Helps Avoid Probate

Probate is the process of doling out your estate to the proper beneficiaries according to your will. It is a costly and arduous process that will place unnecessary grief on your beneficiaries at a time when they will want to focus on healing. In fact, probate can take months or years to complete, meaning your heirs may have to wait until they finally receive their inheritance.
To make matters worse, probate is a very public and painful process likely involving proceedings and hearings, paperwork, and many hours wasted sitting in a courthouse. Also, the chances of disputes among beneficiaries increase, potentially leading to drawn-out and expensive court battles, overwhelming your loved ones.

How to avoid Probate?

It is pretty simple. It involves setting up an irrevocable trust, popularly known as a trust fund, with designated trustees that administer and distribute assets and handle claims according to the grantor’s instructions (that’s you). Trusts are vital to successful estate planning, but you should be aware of the basic kinds of trusts before we get into the nitty-gritty.

Irrevocable Trust vs. Revocable Trust

The grantor of an irrevocable trust cannot alter or modify it in any way, shape, or form once they have created it. They give up ownership and control of the assets they place in the trust to the trustee.
Now, we should never think in terms of pure black and white – there is indeed a way to change an irrevocable trust. Still, it involves creating another trust, transferring assets to that trust, and expensive, complex legal procedures, known as the decanting process.
On the other hand, a grantor can easily modify a revocable trust. A grantor can switch out the beneficiaries, replace the trustee, or cancel it altogether. Complete control and ownership of assets are maintained in a revocable trust. But, they don’t provide tax benefits regarding estate planning because all investments remain part of the grantor’s estate.

Testamentary Trust vs. Living Trust

A living trust is created by a grantor during their lifetime, while a testamentary trust takes effect in death, at which point it goes from a revocable trust to an irrevocable one.

Wealth Transfer Taxes

These taxes aim at your estate, which you want to minimize as much as possible through trusts, deductions, and exemptions. They include estate tax, gift tax, and generation-skipping tax.

Estate Tax

Estate tax has brackets like ordinary income or capital gains taxes, with the highest tax bracket reaching 40%.
In 2023, you only have to pay estate taxes on any net worth over $12.92 million. That figure is the 2023 estate exemption, which will eventually be reduced by half, adjusted for inflation, as of January 1st, 2026. Therefore, it would behoove you to start planning for reduced exemptions sooner rather than later.
But, back to 2023. If your estate is worth $12 million, you’re off scot-free on federal estate tax.
However, if your estate is worth $30 million, you will owe $6,832,000 in taxes, all other things being equal.
That’s a hefty estate tax bill! And if you’re in a state with estate taxes, it can be even more significant. Trusts and other tax planning strategies can help lessen or offset the impact of these taxes.

Gift Tax

Usually, a gift is just a gift, and Uncle Sam doesn’t take notice. The IRS isn’t going to come poking around your grandchild’s birthday party taking note of the presents – unless, that is, one of the presents is worth more than $17,000 (or $34,000 if given as a married couple) in 2023. But don’t fret – there are ways to provide more without paying a hefty gift tax.
Like the estate tax, the highest bracket is 40% in 2023.

Generation-skipping tax (GST)

This tax targets wealth transfers from grandparents to grandchildren, with an exemption amount equal to the estate tax exemption. That doesn’t mean you have twice the exemptable amount, however. Exempted funds can either go to GST, estate tax, or a combination of both but cannot total more than $12.92 million in 2023.

Trust Strategies

You can minimize or even avoid these estate taxes by transferring funds and assets into various trusts. Each trust type serves a unique purpose, and selecting the right one depends on your financial goals and circumstances.
Combined with other trust strategies, you will enhance your ability to lower your lifetime estate tax bill. Here are some examples of specific trusts.

Intentionally Defective Grantor Trust (IDGT)

When setting up an IDGT, the grantor can transfer assets into the trust without paying gift tax, and any future increase in the assets’ value is excluded from their estate for tax purposes.
The “defective” aspect means that the grantor, rather than the trust, pays income tax on the trust’s earnings. This arrangement reduces the grantor’s taxable estate and enables wealth transfer to beneficiaries with minimal or no tax liability.

Generation-Skipping Trust

The exemption allows for a direct transfer to grandchildren or a generation-skipping trust benefiting them without incurring federal GST.

Crummey Trust

A Crummey Trust, named after the first person to take advantage of it, Michael Crummey, allows grantors to minimize gift tax by placing up to the lifetime annual exclusion amount into a trust and then allowing the beneficiary or beneficiaries to take out a certain amount per year without incurring gift tax.
However, there is one nuance: upon placing funds in the trust, the grantor must notify the beneficiary that it is their right to withdraw those funds within 30 days. If they decline, future withdrawals are subject to the rules stipulated in the trust, such as how much they can remove each year and for what purpose. The problem with this is that it may give a child or a younger adult access to large amounts of funds in the initial stages of the trust.

Irrevocable Life Insurance Trust (ILIT)

The death benefit of a life insurance policy is included in your gross estate, potentially bumping you up an estate tax bracket. However, you can potentially avoid this by placing ownership of your life insurance policy into an Irrevocable Life Insurance Trust.
You can place securities such as dividend-paying stocks, ETFs, and Mutual Funds into the ILIT to pay for the costly yearly premiums. Upon the insured person’s death, the payouts to beneficiaries are likely tax-free. One vital thing to be aware of, though, is that there is a 3-year lookback period. Essentially, the ILIT must have been created at least three years prior to death. Considering this factor, creating an ILIT while still relatively young is better. Which means you should create an estate plan earlier rather than later.

Charitable-Remainder Trust (CRT)

You can put assets into a Charitable Remainder Trust to lower your taxable estate. Any income produced by the assets while in the trust goes back to the donor and is taxable. Upon the donor’s death, the value of the assets remaining in the trust is deducted from the estate.

Charitable Lead Trust (CLT)

When a donor contributes assets to a CLT, they receive an income tax deduction for the present value of the charitable interest in the trust. Any interest or income produced by the assets goes to the charitable beneficiary. Any leftover assets are distributed tax-free to the non-charitable beneficiary upon the donor’s death.

Grantor Retained Annuity Trust (GRAT)

A Grantor Retained Annuity Trust is an irrevocable trust that lets a grantor pass down assets to beneficiaries with little or no gift tax. Assets like cash, stocks, or real estate are placed into the trust, and the grantor receives an annuity payment from the trust for a fixed number of years. After the term, any remaining assets in the trust go to the grantor’s chosen beneficiaries tax-free.

Alternative Estate Planning for the High Net Worth Strategies

These are just a few of the trusts at your disposal when creating an estate plan. You can take advantage of many more to keep your taxable estate as low as possible. But that isn’t the end of estate planning tools.

Family LLC

If you have a family-owned business, it may be possible to convert it into a Family LLC, thus providing several benefits, such as asset protection from creditors and a reduction in your estate size. Of particular usefulness is the ability to give children and grandchildren ownership of the LLC through LLC units while maintaining managerial rights. Most importantly, the units passed to family members receive a 40% valuation discount, considerably reducing the beneficiary’s taxable income.

Family Limited Partnership (FLP)

You’re not out of luck if you don’t have a traditional family-owned business. You can still form a Family Limited Partnership. This business entity provides a corporation’s liability protection and the tax advantages of a partnership. There still must be an underlying business reason, such as making joint investment decisions or helping make sound decisions surrounding property management.
Senior family members can hand over assets to the FLP (thus reducing their taxable estate) in exchange for units. Then, they can transfer those units to junior family members. The kicker is that those units are also subject to discount valuation, like in a Family LLC.

In Conclusion

As you can see, estate planning is a highly complex yet critical component of wealth management for Sarasota’s affluent and high-net-worth residents. This article hardly scratches the surface of the million nuances and scenarios that are possible.
Partnering with an expert financial advisor can help ensure that your estate plan is tailored to your unique circumstances and goals, allowing you to enjoy peace of mind knowing your financial legacy is secure.
Don’t leave your legacy – or estate planning – to chance. Contact us today to schedule a consultation and begin crafting your customized estate plan.
Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

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