A Comprehensive Guide to High Net Worth Estate Planning

Imagine working your entire life to build a high standard of living just to be dwindled because of some financial troubles you are not prepared for.

To preserve the wealth you have worked so hard to attain, having an estate plan is essential to guarantee that all your assets will be handled according to how you want it to be distributed upon your death.

High Net Worth Estate Planning Strategies and Considerations

Estate planning is one of the efficient methods of asset protection for high-net-worth individuals. 

It aims to protect your hard-earned riches and safeguard your wealth estate for the family’s future generations in the most effective manner.

It involves creating necessary arrangements through a legal document with your instructions enumerating how you want your assets to be managed and distributed in an event of your incapacitation or death.

It may include anything such as real estate, jewelry, bank accounts, cars, properties, and more.

Although the idea of estate planning can be an inconvenience when you already are trying to juggle multiple tasks in a day, you will want to prioritize it before it is no longer feasible. 

With a lot of challenges during these unprecedented times, you will want to make sure that your finances will be preserved and given to the rightful owners. 

Having a high net worth, you will often encounter people trying to enter your life just to take advantage of your wealth. 

With this, it is necessary to surround yourself with the right people and start planning about your estate.

So, why is estate planning for high net worth individuals so important?

1. Your estate will go to your intended inheritors

By naming your beneficiaries, your assets will be enjoyed by your designated heirs.

2. You can secure the future of your family’s next generation

You can protect and ensure your family’s future through a thoughtfully executed estate plan.

3. You can lessen tax burden for your beneficiaries

As stated in the law, before your beneficiaries can get their inheritance they will pay a considerable amount of money for taxes. 

However, it can be minimized through proper planning.  If you are the owner of a ranch or farm, you can protect your family farm and protect your farm from creditors, and avoid the lengthy and often expensive probate court costs with an irrevocable farmland trust.

4. You can avoid family disagreements

Having predetermined plan set out, you can choose among your family members to control your finances if you become mentally incapacitated or upon your death.

What are the common high net worth estate planning mistakes?

Understanding the benefits and process of estate planning offers you comfort. 

Peace of mind comes with knowing that your choices will be executed professionally and your wealth will be preserved to be given to your rightful beneficiaries. 

However, many mistakes can be made which prevents the successful execution of estate plans.  Which leads to missed opportunities saving your hard earned money with estate tax exemption.

1. Excluding family members from the discussion

Family members excluded from the discussion on how family wealth will be used in the      future might create future family disputes. 

It is important for you to provide ongoing communication to encourage sharing of expectations and concerns among the family members.

2. Trying to handle estate planning alone

While it is true that you can plan for yourself, it is still necessary to hire someone who is qualified and has a better knowledge and experience to guide you with the estate planning.

3. Underutilizing trusts

Trusts are used in conjunction with your will. 

It allows you to choose a trustee who will manage your assets upon your death. 

According to predetermined terms, the trustee is the one responsible for the transfer and distribution of your assets.

Trusts can be of many types. It can be through charitable foundations, dynasty trust, qualified personal residence trusts, and many more.

Ultra High Net Worth Estate Planning Strategies

In order to avoid mistakes and set up an effective estate and estate taxes strategy tailored to your family’s unique situation, it is inevitable to seek guidance from a knowledgeable lawyer.  

However, it is still useful to be cognizant of some of the effective estate planning strategies before you begin consulting with an expert. 

1. Family Limited Liability Company (FLLC) or Family Limited Partnership (FLP)

A family limited partnership is a type of limited partnership inclusive to family members. 

Limited partnership is divided into two classes: the general partner(GP) and the limited partner (LP).

This strategy is very complex. Generally, it allows you as the GP or general partner to manage, control, and decide for your financial assets.

After you pass away, your responsibilities will be transferred to your LP or limited partners who are your family members or heirs. 

They will get a reduction on federal estate taxes, gift taxes, and income taxes. 

During this time, they will gain the responsibility in managing your finances.

2. Charitable foundations: Charitable lead trust (CLT) and charitable remainder trust (CRT): Grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs)

Another effective way to secure your assets and reduce taxes is to give a part of your estate to charity. 

Specifically, creating charitable trust is a great way to continue the charitable bequest you will have to leave behind. 

Charitable Lead Trust (CLT)

With a charitable lead trust (CLT), part of your assets will be handed over to a charity with tax exemption to reduce the value of your estate. 

  The charitable tax break will be beneficial on your part. 

After the predefined time, the remainder of the trust will be passed on to your beneficiaries.

Charitable Remainder Trust (CRT) 

With a charitable remainder trust (CRT), you can shift an appreciating asset such as stocks in an irrevocable trust. 

You can still increase the value of these financial assets throughout your existence.

Upon your death, the remainder of the assets will be donated to charity. 

By doing this, your estate tax will be reduced, the tax deduction will be earned, and capital gains tax will be avoided. 

Grantor retained annuity trusts (GRATs)

With a grantor retained annuity trusts (GRATs), irrevocable trust will be created for a certain period of time. 

You will be paying a tax once the trust is established. After estates are placed under the trust, you are going to pay an annuity. 

Once the trust expires, the beneficiaries will receive the assets without paying any taxes.

Charitable lead annuity trusts (CLATs)

With a charitable lead annuity trust (CLATs), donor-advised fund, private foundation, or charity of your choice will receive payments every year. 

It can either be for a term of years or throughout your lifetime. 

After the predetermined period, your remaining CLAT assets will be given out to the non-charitable beneficiaries. 

Usually, they are your intended inheritors.

3. Dynasty Trusts

As a long-term trust, dynasty trust can be used to pass wealth from generation to generation. 

It is often used to take advantage of estate tax exemption and gift tax exemption. 

A dynasty trust could last forever as long as it can be kept “alive”.

Meaning, the account should not be depleted by taking large withdrawals by the beneficiaries or heirs.

After you pass away, your responsibilities will be transferred to your LP or limited partners who are your family members or heirs. 

They will get a reduction on federal estate taxes, gift taxes, and income taxes. 

During this time, they will gain the responsibility in managing your finances.

4. Generation-skipping trusts (GST)

From the title itself, generation-skipping trust is a binding trust that skips a generation after yours. 

Basically, it will skip your children and proceed directly to your grandchildren.

For a generation-skipping trust to work, it may not be necessary that you and your recipient are blood-related.

In a generation-skipping trust, you can find any recipient who is at least 37 and a half years younger than you but should not be your spouse or ex-spouse.

5. Spousal Lifetime Access Trust (SLAT)

Another way to transfer your assets is through spousal lifetime access trust. 

It is an estate planning strategy used by married couples. 

You will make a gift into an irrevocable trust to benefit your spouse or each of you may choose to fund the trust.

This strategy may offer an advantage to married couples as this provides a federal lifetime gift and estate tax exclusion.

6. Irrevocable Life Insurance Trust(s)

An Irrevocable Life Insurance Trust, you as the grantor who established the trust cannot amend it.

The trust acts as the owner and beneficiary of the life insurance policy and works by excluding proceeds from life insurance policies from estate taxes.

When you die, proceeds will be distributed according to the terms of the trust.

7. Gifting and Estate Tax Exemptions

Utilizing a gift and estate taxes strategy can be considered as the most impactful method to reduce your estate size and optimize estate planning.

As a US taxpayer, you can avail a lifetime gift and estate tax exemption so you will not owe tax on any gifted funds as long as you do not exceed the lifetime exemption.

8. Business Succession Planning

Business succession planning is an important process to ensure your business will continue operating efficiently and capably after you are gone.

If you own a business, you can pass it on to your children or grandchildren by getting them involved in the business as early as possible.   

As they get involved, they will also gain experience and understanding of the daily transactions of the business. 

This will provide you a sense of relief that your business will be handed over to capable hands.

9. Income Splitting

An effective way to reduce tax burden is to divide income among the family members. 

Following the tax system, those who earn higher income will have to pay higher taxes. 

You can lessen your family’s overall tax burden by dividing the income among those family members who earn lower income.

Now that you know the basics of high net worth estate planning and the strategies that can be used to set up an effective strategy, you can already perceive the many reasons why  planning a strategy is an essential factor to safeguard your wealth.

Using the strategies mentioned above, you can ensure that your intended beneficiaries will have a fair share of your properties or assets. 

It may be true that planning can be done by yourself. However, you still need to work with an experienced lawyer to be able to deal with the legal matters. 

When it comes to planning your estate, it will always be best to consult experts about your options. 

This will ensure that the riches you worked hard to attain will be handled effectively.

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