6 Planning Tips for Every High-Net-Worth Estate
Making decisions about high-net-worth estates demands careful planning to eliminate regrets later. You want to protect your assets and protect your family. Unfortunately, all-too-often high-net-worth individuals’ hard-earned property ends up vanishing due to a lack of understanding about how to protect assets properly.
Below, you’ll find six tips that every high-net-worth estate needs to employ.
1. Take Advantage of Strategic Gifting
Giving assets away to avoid estate taxes seems like such an obvious solution that there has to be a catch, right?
There is. The IRS charges a gift tax. It has an exemption, but what many people don’t realize is that the gift tax exemption is shared with the estate tax exemption. Every dollar you “save” through the gift tax exemption is one that is taken away from the estate tax exemption.
Why are we mentioning gifting as a strategy that you should use, then? Because it also comes with an annual exclusion.
Every year, you are allowed to gift anyone you want (and as many people as you want) up to $15,000 completely tax free. Combined with your spouse, that exclusion doubles to $30,000.
Essentially, you can give family members and other loved ones up to $30,000 every year without paying any taxes on that gift. Want to take it a step further?
2. Trust in the Crummey Trust
Instead of simply giving that money away every year to your beneficiaries, you can use that money to fund an irrevocable trust — the Crummey Trust.
Why is the Crummey Trust such a valuable tool? Not only can you choose in advance how assets in the trust are to be used, the value of the assets can accrue without having to pay estate taxes on that growth from the time the trust is funded until the time of death.
Be aware, though: for this trust to work properly, you need a beneficiary who is willing to cooperate, because they are required to have a limited period during which they can access the assets after they are placed in the trust.
3. Look into Irrevocable Life Insurance Trusts
Irrevocable life insurance trusts (ILIT) are essentially ways to pay for a life insurance policy without paying any taxes for the premium payments or the eventual payout on the policy.
Here’s how it works: you “gift” the payments for the premiums to the trust itself. The trustee then uses that money to pay the insurance company. After you die, the policy pays into the trust. Then the trustee just has to distribute the money as you directed in the documentation you used to set up the trust.
4. Skip a Generation
You’ve likely heard of generation-skipping trusts before. They are widely used in many places to prevent cumulative estate taxes that can build up over generations.
How exactly do they work?
First, you fund the trust. Then, you either pay the generation-skipping tax (GST) or use a GST exemption. Once this is done, you won’t have to pay estate taxes on the assets in the trust as long as they remain in the trust.
Essentially, the trust can slowly dole out money to future generations for as long as it lasts, and all the while it will remain protected from creditors, taxes, and even the poor decisions of your beneficiaries.
Under Florida law, these kinds of trusts can continue for more than 300 years.
5. Set Up a Family Limited Partnership
Don’t want to put your money in a trust? How about a business instead? Florida has something called the family limited partnership or LLC that is designed to hold familial assets as a corporate entity.
The difference between this and the other options on this list is that it allows you to provide ownership interests in the corporate entity while still maintaining control of that entity.
Because these ownership interests are calculated as having 40 percent less value than traditional assets, it is possible to transfer far more wealth to recipients than you would otherwise be able to do.
6. “Trust” Beneficiaries with Your Residence
With a qualified personal residence trust (QPRT) you place the title of your residential real estate in a trust while reserving the right to continue to live there for a time period you define. Once this period is over, the title is generally held in fee simple by the trust.
Doing this removes the value of the property from your taxable estate.
When creating the trust, you must declare how the trustee will use or distribute the property after the defined term ends.
These are not the only tools you can use to protect your high-net-worth estate. No planning can mean significant taxes, court, costs, and a host of unpleasant surprises. For more tips and professional guidance, feel free to reach out.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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