A Quick Guide to High-Net-Worth Estate Planning

Estate planning can be tricky and very challenging, especially if you're a high-net-worth individual (HNWI). Not only are the nuances of estate planning fairly complicated, but things in the industry are also constantly changing, which often makes it difficult to keep up.

From tax laws to tax liabilities to other issues that affect the family, there are so many things you have to consider. Some of the goals of HNWIs include protecting inheritances for heirs, minimizing estate taxes, avoiding the probate process, and appointing the right trustee. But how do you navigate this complex process? This article serves as a quick guide to planning your estate.

Key Takeaways

  • Estate planning can be complicated, but there are ways to help make the process much smoother.
  • When you're ready to plan your estate, make sure you hire someone familiar with estate laws and planning.
  • Be sure to minimize your estate taxes by knowing your gift, estate, and generation-skipping transfer tax limits, which may change yearly based on inflation.
  • Make sure you make provisions like a power of attorney, a living will, or a revocable trust if you become incapacitated.
  • Check with your estate planner on the best way to avoid probate.

Choose the Right Trustee

First, make sure you hire someone to take care of your estate planning needs. Unfortunately, some professionals don't act in the best interest of their clients. They may opt for a route that provides them with the most income opportunity rather than suggest ways to reduce your costs and guarantee that assets end up in the right hands. But how do you know whether you can trust your trustee?

Do your research and find someone who will work for and with your needs. Be sure to ask questions, seek out and read reviews, and discuss all your estate planning goals with the person you choose to represent you. The information below is a good starting point for selecting the right estate planning attorney or trustee.

High-net-worth individuals generally have $1 million or more in liquid assets.

Minimizing Estate Taxes

One of the many goals working people have is to save up for retirement and to build wealth to leave their loved ones after they die. But doing so often comes at a price. There are taxes to consider, which, if you don't make the right choices, can deplete the amount of your estate.

You should consider every kind of tax scenario while you plan your estate. This includes income, gift, estate, and generation-skipping taxes. When you exclude income taxes, the remaining three are referred to as wealth transfer taxes. Federal taxes are 40% of the value of whatever is being measured for each type of tax within that group.

Keep in mind that it is possible that your state also imposes taxes, so you should check with your state to find out.

Gift and Estate Taxes

Gift and estate taxes generally change each year for inflation. But the passing of the Tax Cuts and Jobs Act (TCJA) in 2017 increased the exemption for gift and estate taxes—together called a unified credit—altogether. The exemption is:

  • $12.92 million per individual for 2023 ($12.06 million for 2022)
  • $25.84 million for married couples for 2023 ($24.12 million for 2022)

Anything above that amount is taxed at 40% of the gift’s value.

You are allowed to give a gift of $17,000 per year per person ($16,000 in 2022), and there is no limit to the number of recipients you have. For example, if you give someone a gift of $25,000 in 2023, the first $17,000 (or $16,000 in 2022) is exempt. This is referred to as an annual exclusion gift. Any remaining amount you give to someone is subject to a gift tax.

You don't need to be a high-net-worth individual to plan an estate. However, planning is worth it, even if you only have a few hundred thousand in assets.

The same rules apply to estate taxes, but the $12.92 million estate tax exemption for 2023 is reduced by the value of the gifts you give throughout your lifetime. So if you gave $3 million worth of gifts using the lifetime gift tax exemption, your estate tax exemption would now be $9.92 million.

Generation-Skipping Transfer Taxes

Generation-skipping transfer taxes are paid any time you give property to a grandchild or great-grandchild. Once again, you pay tax based on 40% of the value of the gift(s), and there is a tax exemption of up to $12.92 million for 2023 ($12.06 million for 2022).

Just in case you're wondering, this tax exists so grantors (creators of a trust) don’t bypass the next generation in order to avoid tax obligations.

Incapacitation Planning

If you worked your entire life to save for retirement and to pass on an inheritance, you'd be furious if it dwindled or was wiped out because something happened that prevented you from setting it all up. In case you become incapacitated because of an accident, illness, or from aging during your lifetime, you want to make sure you:

  • Provide care for dependents
  • Appoint a trustee
  • Guarantee the orderly management of your property
  • Specify your end-of-life treatment if you are in a permanent vegetative state

To accomplish these goals, you must ensure certain steps are taken.

  • Appoint a durable power of attorney (POA): This kind of POA allows the agent to take charge of financial and legal matters, along with those involving any property, after you become incapacitated. By doing so, you can ensure your agent can manage your bank accounts, buy and sell property, manage other assets, and open your mail.
  • Consider a healthcare power of attorney (HCPA): This document allows your agent to determine medical treatment, including doctor and hospital selection, long-term care, and specific courses of treatment.
  • Appoint a Health Insurance Portability and Accountability Act (HIPAA) release agent: This agent can access your protected medical information.
  • Complete a living will: Also referred to as an advance directive. It indicates if you want a feeding tube removed and whether you want any treatments stopped to allow for a natural death.
  • Create a revocable trust: This appoints a successor trustee.
  • Draw up a guardianship declaration: This ensures any minor children are taken care of by the guardians you choose.

Avoid Probate With a Living Will

Many estate planning attorneys will try to lead you toward a traditional will. Why? Because they benefit more than they would if you had a living trust. Be wary of estate planning attorneys who try to sell you on the idea that a living trust is more expensive and not a better option than a will. A living trust is more expensive upfront but not over the long haul. If you want to avoid unnecessary costs, you need to avoid the probate process.

To accomplish this goal, you should opt for a living trust instead. Since it’s a trust, not everything will be in your name, which means you can bypass probate. Despite not everything remaining in your name, you still have control of your assets while you're alive. Remember, you can appoint a successor to manage your estate if you become incapacitated.

A living trust offers other advantages as well. For example, if it’s a revocable trust, it can be amended, modified, or revoked at any time. A revocable trust also qualifies as a grantor trust, which allows you to move assets in and out of the trust without paying taxes.

You can set limitations if you’re concerned with how a beneficiary will behave with their inheritance. For example, you can set a limitation that the beneficiary can only use the inheritance for health or education purposes. You can also appoint an independent trustee who will have to approve all distributions.

To guarantee your assets end up in the right hands, be sure to create a specially designed trust where the shares of the trust will remain in the trust's name and transfer to each heir when you die. This disallows a spouse from transferring assets to their children from a previous marriage. It will also disallow that spouse from transferring assets to a new spouse. Additionally, this kind of trust will protect your heirs from creditors and bankruptcy.

What Is a High Net Worth Estate?

Generally, a high net worth estate is one that is worth more than $1 million in liquid assets.

At What Net Worth Should You Have a Trust?

You don't necessarily need to be a high net-worth individual to create a trust. If you have assets you'd like to pass on to your friends and loved ones, a trust can help you bypass the lengthy probate process.

How Do Billionaires Avoid Estate Tax?

Many use special trusts such as Grantor Retained Annuity Trusts and others to avoid paying estate taxes.

The Bottom Line

Now you know the basics about how to minimize estate taxes, plan for the event of incapacitation, avoid the probate process, and protect your intended beneficiaries from immoral intentions. This information should be helpful when hiring an estate planning attorney. 

Article Sources
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  1. Internal Revenue Service. "What's New - Estate and Gift Tax."

  2. Internal Revenue Service. "Estate Tax."

  3. Internal Revenue Service. "Frequently Asked Questions on Gift Taxes."

  4. Internal Revenue Service. "Instructions for Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return," Pages 46-47.

  5. Internal Revenue Service. "Abusive Trust Tax Evasion Schemes - Questions and Answers."

  6. Fidelity. "Grantor Retained Annuity Trusts."

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