Strategies to Manage Your Wealth

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 have confidence in knowing 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 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

One strategy to potentially reduce your estate tax liability is to consider giving your heirs some of your assets while you’re living. In 2024, you can give up to $18,000 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 can be a tax-efficient strategy for some individuals. A trust is a legal arrangement that allows the person who has established it to both manage it and distribute assets 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: Consider Utilizing Your Life Insurance for Financial Planning

Life insurance can be a useful tool that may potentially provide financial support for your heirs and help manage 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. The proceeds from the life insurance policy can potentially help pay the estate taxes, which could help maintain the core estate.

Tax-Efficient Estate Planning Tip #4: Maximize Contributions to Your Retirement Accounts

Contributing the maximum allowable amount to your retirement accounts, such as 401(k)s and Traditional IRAs, can potentially reduce your taxable estate and increase your retirement savings. 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.

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) to pass wealth down to future generations while facilitating tax protection. 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 may help to mitigate the risk of 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 trust allows you to generate an income stream for the individual or beneficiaries of your choice for a set period. 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.

Estate Planning, when done with tax efficiency in mind, can be a part of your overall wealth management strategy.

To mitigate tax obligations and foster asset distribution according to your plan after your passing, tax-efficient estate planning is crucial for high-net-worth individuals. Explore the strategies we’ve discussed to potentially manage your taxable estate and support financial independence for your loved ones. 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.

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