Estate planning can be complex, both from a legal and financial perspective, as well as a personal one. Thinking about the end of your life can be fraught with emotions, but it’s an important undertaking if you want to ensure that your assets will be distributed according to your wishes. If you are a high-net-worth individual with significant assets, estate planning is a process that requires careful attention because you will want to employ tax-efficient estate planning strategies in order to leave your heirs with the lowest tax burden possible. Below, we’ll discuss some of these tax-efficient estate planning strategies for your consideration as you plan for the disposition of your estate.
Tax Efficient Estate Planning Tip #1: Gift Your Assets While You Are Alive
Among the most straightforward strategies to reduce your estate tax liability is to give your heirs some of your assets while you’re living. In 2024, you can give up to $18,0001 to someone in a year without having to report it to the IRS on a gift tax return. If you multiply this by the number of heirs you want to make gifts to, you can reduce the value of your estate significantly, and thus, the tax that you’ll owe on it.
Gifts can also be made to any charity of your choice. This strategy helps you to improve the lives of others and support causes that are meaningful to you with the additional benefit of an immediate tax deduction. Like gifting to your heirs, this also allows you to reduce your taxable estate.
Tax Efficient Estate Planning Tip #2: Establish a Trust
Creating a trust is another tax-efficient strategy. A trust2 is a legal arrangement that allows the person who has established it to both manage it and ensure that its assets are distributed according to their instructions. By transferring assets such as real estate, bank accounts, or investments into the trust, those assets are effectively removed from the taxable estate. There are different types of trusts, and you’ll need to do your due diligence to determine which is right for your needs.
Tax-Efficient Estate Planning Tip #3: Put Your Life Insurance to Work
Life insurance3 is an often overlooked, yet effective, tool that will financially benefit your heirs and minimize your estate tax liability. A strong advantage of life insurance is that the proceeds paid to your beneficiaries are generally federal income tax-free.
Life insurance payouts can also be used to cover any estate taxes owed, thereby eliminating the potential need for your heirs to have to come up with the money required to pay those taxes. For a high net-worth individual, it may be a smart strategy to purchase a life insurance policy with a pay-out that will cover the amount of estate tax they anticipate owing. Thus, the proceeds from the life insurance policy can pay the estate taxes, which ensures that the core estate remains intact.
Tax-Efficient Estate Planning Tip #4: Maximize Contributions to Your Retirement Accounts
By contributing the maximum allowable amount to your retirement accounts, such as 401(k)s and Traditional IRAs, you can reduce the value of your taxable estate while boosting your own finances for retirement. These types of accounts are strong, tax-efficient estate planning tools because retirement contributions are tax-deductible, thus reducing your taxable income. The investment growth is also tax-deferred until withdrawal. It’s important to consider designating beneficiaries for your retirement accounts so that those assets are passed on directly to your heirs and avoid probate.4
Tax-Efficient Estate Planning Tip #5: Consider a Family Limited Partnership
As an estate planning vehicle for high-net-worth individuals, some families establish Family Limited Partnerships (FLPs)5 to pass wealth down to future generations while securing some tax protections. In a typical FLP, those who establish the partnership transfer assets to it in exchange for general and limited partnership shares. The family members who are the general partners manage the partnership and have control over its assets. The limited partnership shares are distributed among other family members who then become limited partners.
Transferring assets to an FLP removes those assets from the general partners’ estates, which reduces their estate size and lowers the estate tax burden. For high-net-worth individuals, it can also be advantageous because of the valuation discounts for the limited partnership interests. The discounts are the result of the FLP’s ability to take advantage of the typically lower tax brackets of its limited partners. For example, a family member in college or just starting their career will probably be in a lower tax bracket than the general partners, making the interest less valuable. This results in a lower taxable value for the estate.
Because the FLP is a separate legal entity, the assets within become the property of the FLP itself. This protects the assets from potential creditors’ claims. It also provides for the distribution of income and capital gains among family members, which can result in efficient tax planning.
Tax-Efficient Estate Planning Tip #6: Charitable Trusts
A Charitable Remainder Trust (CRT) is specifically designed to reduce taxable income. It enables high-net-worth individuals to achieve philanthropic goals while still generating income and gaining the advantages from current tax year benefits. A charitable remainder trust6 allows you to generate an income stream for the individual or beneficiaries of your choice for a set period of time. Once the trust’s term expires, the remainder of donated assets are directed to your chosen charity or charities. CRTs allow you to reduce your taxable estate while providing you with a tax deduction for the charitable contribution when the trust’s term ends.
Tax-Efficient Estate Planning Benefits Your Overall Wealth Management Strategy
To minimize tax obligations and ensure your assets are distributed according to your plan after your passing, tax-efficient estate planning is crucial for high-net-worth individuals. Consider the tips that we’ve touched upon to help you reduce the value of your taxable estate while ensuring financial security for those you care about. Of course, every individual and family’s financial circumstances and goals are unique, so work with a financial advisor and tax advisor to be sure you choose the strategies that will best serve your needs.
Sources:
- [1] https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
- [2] https://www.nerdwallet.com/article/investing/estate-planning/setting-up-a-trust
- [3] https://www.investopedia.com/articles/pf/06/transferlifeinsurance.asp
- [4] https://www.investopedia.com/articles/personal-finance/100616/do-retirement-accounts-go-through-probate.asp#:~:text=3 If the account owner,the estate will be divided.
- [5] https://www.wsj.com/articles/estate-tax-rise-family-limited-partnerships-11669924025
- [6] https://www.irs.gov/charities-non-profits/charitable-remainder-trusts
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Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. Megan is also a fully licensed Life, Health, and Annuity agent. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.
Amy Anderson joined the ILG Financial team in 2023 as the client relations coordinator. Her responsibilities include scheduling of appointments, annual check-up notifications, and annuity and required minimum distribution assistance. She is a graduate of Harding University with a degree in Computer Information Systems. Amy and her husband have two children and she enjoys reading, crocheting, music and spending time with her family.
Terri Center joined the ILG Financial team in 2019 as client services manager. She handles client records, application processing, and gathering information to provide a professional and friendly experience with all of our clients. Terri is a graduate of Oakland University. She is married and has two children. She enjoys hiking, family time, and puzzle challenging video games. She also likes to share her creativity in her canvas paintings and sewing projects.
Jessica Carson joined the ILG Financial team in 2018 as an agent. Jessica and her husband have four children, two dogs, 3 barn cats, 5 chickens, and three parakeets. She indeed loves her children and pets! When not at work, Jessica enjoys playing the piano and cello as well as traveling and spending time outside with her family, hiking, fishing, and boating.
Chase Lopez joined the ILG Financial team in 2020 as an advisor. Chase is a 2016 James Madison University graduate with a degree in management. Chase has been trained under the tutelage of Dave Lopez, who is not only the founder and managing member of ILG Financial, but also is Chase’s uncle and godfather. He also enjoys working alongside his cousin, Megan, who is Dave’s daughter.