Gifts + Estate Planning

Estate Planning: A Quick Guide for High-Net-Worth Individuals

BY Leslie Thompson | CFA®, CPA, CDFA™, Chief Investment Officer, Co-Founder | Aug 12, 2021

Estate planning can be complicated, especially if you’re a high-net-worth or ultra-high-net-worth individual.  There are many things to consider when estate planning, as the varying nuances of estate planning can be relatively complicated as rules in the industry are constantly changing. 

If you’re a high-net-worth or ultra-high-net-worth individual, some of your goals might include protecting inheritances for your heirs, minimizing estate taxes, and avoiding probate.  So, how exactly do you navigate the complex process of estate planning?  Here’s our short guide to planning your estate.

Minimize Estate Taxes

A common goal many working people have is to save for retirement and build wealth throughout their lifetime to leave to their loved ones after they die.  Doing so often comes at the price of having estate taxes.  If you don’t make the right choices, taxes can deplete the amount in your estate.

When planning your estate, you should consider all of the tax scenarios that could apply to your situation. This includes income taxes, gift taxes, estate taxes, and generation-skipping taxes.  When income taxes are excluded, the remaining three tax types are referred to as wealth transfer taxes, and those three taxes are 40% of the value of whatever is being measured. 

It’s also important to keep in mind that your state may or may not impose estate taxes. 

Generation-Skipping Transfer Taxes

Generation-skipping transfer taxes are paid any time you give property to a grandchild or great-grandchild.  Again, taxes paid are based on 40% of the gift’s value.  There is an exemption on estates with a value less than $11.7 million.

Gift and Estate Taxes

In 2017, a unified credit called the Tax Cuts and Jobs Act (TCJA) was passed, increasing the exemption for gifts and estate taxes.  For the 2021 tax year, the exemption is $11.7 million per individual and $23.4 million for married couples.  Anything above those amounts is taxed at 40% of the gift’s value.

The good news is, you are allowed to give a tax-free gift of $15,000 per year per person, and there is no limit to how many individual recipients you have. 

Planning for Incapacitation

If you spent your entire life working to save for retirement and so you can pass on an inheritance, you’d probably be livid if that inheritance was dwindled or completely wiped out. The good news is that you can avoid that situation by planning properly if you become incapacitated.  If something were to happen to you and you were no longer mentally sound, here are a few things you’ll want to make sure to plan for:

  • Provide care for dependents, such as your spouse and/or any children you have
  • Appoint a trustee
  • Guarantee the management of your property
  • Specify your end-of-life care wishes and/or treatment you’ll want if in a permanent vegetative state

You will need to take steps to accomplish these goals.

Firstly, you’ll need to appoint a durable power of attorney.  This kind of POA allows the agent you’ve named to take charge of your financial and legal matters and matters involving any property you own after you become incapacitated.  Having a durable power of attorney appointed ensures that your agent can manage your bank accounts, buy and sell property, manage other assets, and open your mail.

Next, you’ll want to consider appointing a healthcare power of attorney (HCPA).  This person should be someone who you trust to determine your medical treatment, including selecting doctors, hospitals, and to help determine specific courses of treatment.  This person will also be able to choose long-term care options.

You’ll also want to complete a living will, also known as an advance directive.  It indicates what type of medical treatment you want in the event you have a terminal illness or enter a permanent vegetative state.  It will include things like a do not resuscitate order, whether or not you want a feeding tube, and it also allows treatment to stop to allow for a natural death if that is what you wish.

Something else you should consider is a revocable trust, which is designed to function while you’re alive.  It is a separate legal entity created to own property, such as your home or investments.  It can also designate a successor trustee. 

Finally, if you have minor children, you should have a guardian declaration drawn up to specify who you want to take care of your children in the event of your incapacitation or death.

Choosing the Right Trustee

One of the most important aspects of estate planning is hiring someone to help take care of your estate planning needs.  Unfortunately, some professionals do not act in the best interest of their clients.  Your best bet would be to hire someone from a fiduciary firm, meaning they put their clients’ interests ahead of their own and have a duty to preserve good faith and trust.  Fiduciaries are bound both legally and ethically to act in the client’s best interest.

Do your research.  Find someone who will work for your needs.  It may take meeting more than one advisor before choosing the best fit for your situation.  Be sure to discuss your estate planning goals with the person you choose to represent you.

Things to Remember

  • Make sure you take steps to arrange provisions such as a power of attorney, a living will, revocable trust, and have plans in place in the event you become incapacitated.
  • Make sure you hire an estate planning professional with your best interests at the forefront of everything they do.
  • Check with your estate planner to discuss the best way to avoid probate
  • Minimize your estate taxes by knowing the gift, estate, and generation-skipping transfer tax limits and estate tax laws in your state.

These are the basics of estate planning for high-net-worth and ultra-high-net-worth individuals.  Everyone has unique, and complex estate planning needs to be based on their situation.  Contact us today to start your estate planning journey with one of our experienced estate planning professionals.

This content is developed from sources believed to be providing accurate information, and provided by Spectrum Management Group. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.