Estate tax planning is a critical area for UHNW families. Many have illiquid assets such as investments, real estate, and business interests that could be hit with substantial taxes.
By utilizing effective strategies, New York families can minimize their estate tax liability and increase the amount passed to their heirs. Jenkins Fenstermaker can help you accomplish your estate and tax goals.
Gifting
A key estate planning strategy for UHNW families involves gifting. Generally, gifts made while an individual is alive can be used to minimize estate taxes on their taxable estate. This is accomplished by transferring assets to loved ones in an irrevocable trust.
For example, a home can be transferred to heirs without incurring gift tax consequences using a qualified personal residence trust (QPRT). This technique allows the grantor to retain the right to live on the property for a specified period. During this time, the gifted property is excluded from their taxable estate while providing the grantor with an annual income tax deduction.
Another excellent estate tax planning strategy for UHNW individuals and families is a private foundation. This type of charitable trust can provide a tax deduction while allowing you to support the most critical causes for you and your family.
When implementing any gifting strategy, it is critical to consider the size of your overall taxable estate and the potential impact of state taxes. Additionally, it is crucial to consider the ability of your heirs to manage the assets you are giving them. For example, suppose you are considering gifting your family business to one of your children, but that child needs to be more capable and interested in running the company. In that case, transferring this asset to an irrevocable life insurance trust might be better.
Charitable Giving
Charitable giving is a beautiful and tax-efficient way to leave a legacy. It allows for a deduction from the gross estate, potentially lowering the overall value of the estate, which, in turn, reduces estate taxes. The most common form of charitable giving is including a charitable bequest in your will. But you can also consider naming charities as beneficiaries of your life insurance policies, retirement plans (like IRAs and 401(k)s), nonqualified deferred compensation plans, and trusts.
A charitable remainder trust (CRT) is an irrevocable trust that provides income for you and your family while donating a percentage of the trust’s total value to charity each year over a designated period. These trusts are a great way to minimize income taxes, and they often have favorable tax treatment in high-interest rate environments.
Donor-advised funds are another excellent tool for high-net-worth individuals and families to take advantage of, allowing you to make a tax-deductible contribution today while distributing it over time to charitable organizations. Finally, be sure to keep beneficiary designations up-to-date on all of your assets, especially those with transfer on death (TOD) provisions, as they can impact both the amount of the estate and any applicable inheritance taxes.
Asset Protection
For UHNW individuals and families, estate tax in California planning is about more than mitigating taxes during a lifetime. It also involves preserving and protecting financial assets that beneficiaries will inherit. This requires a strategy that is highly customized to your unique financial situation.
For example, suppose you have a substantial portion of your wealth tied up in business or real estate – illiquid assets that will take some time to liquidate. If you die today, your estate could owe more in taxes than is available in liquid net worth. This can force heirs to sell valuable family assets or investments to pay the resulting estate taxes.
One asset protection strategy is to create entities such as a family limited partnership or LLC to hold and protect your assets. These structures can provide legal barriers to seizing your purchases by creditors and lawsuits.
Another strategy is to divide ownership of a family-owned business between family members to qualify for valuation discounts when the IRS calculates your gross taxable estate. Moreover, you may “port” your spouse’s unused estate tax exemption into your estate, saving millions in taxes for your heirs. This complicated process should be discussed with an experienced UHNW estate planner.
Estate Administration
Due to the intersection of federal, state, and property laws, estate administration is a complex process that can take months or years. This is especially true for UHNW individuals who have a combination of difficult tax situations and substantial assets.
Irrevocable life insurance trusts are a common strategy to minimize estate taxes. However, many people need to realize that the value of life insurance is included in their taxable estate. As a result, families need to carefully consider the ramifications of including life insurance in their overall estate planning strategy.
Another joint estate tax reduction strategy is a qualified personal residence trust (QPRT). This technique allows a person to transfer their home to their beneficiaries without paying estate tax. To do this, the homeowner transfers their home ownership to the trust while retaining the right to live in the house for several years.
In addition to these strategies, some families may be able to take advantage of “minority owner” valuation discounts for their privately-held businesses. This is a nuanced planning approach but can result in significant savings for certain families.
