4 Ways to Avoid the Estate Tax for High Net Worth Families

Many high net worth individuals have worked very hard to accumulate wealth and build something of value that they can pass on to their families once they are gone. However, their heirs may be faced with exorbitant tax bills associated with this transfer of wealth when the time comes.

Many high net worth individuals have worked very hard to accumulate wealth and build something of value that they can pass on to their families once they are gone. However, their heirs may be faced with exorbitant tax bills associated with this transfer of wealth when the time comes.

In the upcoming year, the federal estate tax exemption is set to rise again, thanks to inflation. Luckily, there are numerous wealth management strategies you can implement that will allow you to preserve your estate and prevent your family from having to sell off their inheritance to pay the IRS.

In this article, we’re going to cover what the estate tax is, what it includes, and some estate planning options that can significantly reduce the amount your family will owe.

What Is the Current Estate Tax Limit?

Currently, the federal estate tax is set to 40 percent on fortunes exceeding $11.7 million for individuals and $23.4 million for married couples. Additionally, some families could face greater taxes depending on the state they live in. There are 16 states plus the District of Columbia that levy estate and/or inheritance taxes, which include Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington.

What Assets Are Included Under the Estate Tax?

Your heirs will have to pay taxes on the total value of your estate minus your debts, which will include all non-cash assets, such as your home, business properties, or art collection, in addition to liquid assets, such as cash, investments, and retirement accounts.

Why Estate Planning Is Absolutely Necessary for High Net Worth Families

If you haven’t leveraged the many estate planning tactics available to protect your wealth and the vast majority of your estate is held as non-cash assets, your family would have no choice but to surrender a significant portion of secured holdings to cover their tax bill.

For example, if your estate is valued at $30 million but ninety percent of that is tied up in non-cash assets such as rental and investment properties or a business, your beneficiaries will end up having to auction off your illiquid assets to pay off the federal estate tax.

If you don’t want your family to be forced to sell off property to pay the government, you need to create an estate plan that includes strategies to minimize your estate tax as soon as possible – no one knows when their time on earth is up.

4 Ways to Slash Your Estate Tax and Keep Your Wealth in the Family

  1. Create a Trust

There are two basic types of trusts: a revocable trust, also known as a living trust, or an irrevocable trust.

Revocable trusts allow you to transfer your assets into a fund that can be managed by you, the grantor, and/or an appointed trustee. As the grantor, you maintain control over these assets and may alter the terms of the trust at any time, including naming and un-naming beneficiaries. Revocable trusts have several benefits, the primary one being the ability to circumvent the time-consuming and expensive process of probate. However, living trusts do not save you on taxes. Because you have access to and control over these funds, the IRS will tax revocable trusts as part of your estate.

Setting up an irrevocable trust fund, on the other hand, allows high net worth individuals to essentially detach portions of their wealth from their estate thereby reducing the estate’s value as well as their tax liabilities. An irrevocable trust requires the trust maker to surrender all control over any assets put into the fund. As the grantor, you must name a trustee or trustees who will assume responsibility over the trust fund. The terms of an irrevocable trust are set in stone upon creation.

  1. Give Gifts to your Family

Another way to circumvent the estate tax is to give away some of your wealth to family or friends – relation does not matter. You just have to be careful to observe the gift tax exemption requirements. Individuals can give gifts worth up to $15,000 per person per year without having to pay the federal gift tax. There is no limit to the number of people that can receive gifts, as long as you do not exceed the lifetime exemption limit of $11.7 million. For married couples, the annual exclusion is double: $30,000 per person. Further exclusions from the federal gift tax include gifts to your spouse and payments made for someone else’s tuition or medical expenses – typically, there are no limitations imposed on these forms of contributions.

  1. Donate to Charities

Making contributions to tax-exempt charities is a great way to not only sponsor causes that matter to you but also reduce your estate tax and claim additional tax breaks. To leverage this option, there are two forms of charitable trusts you can create: charitable lead trusts (CLTs) or charitable remainder trusts (CRTs).

With a charitable lead trust, assets are transferred to a fund that will make regular payments to one or more designated tax-exempt charities. The duration of the CLT can be set to span the original grantor’s lifetime or that of several individuals. After the predetermined term of the CLT ends, any remaining funds will be distributed to the beneficiaries, whether charity, family, or other individual or organization.

Charitable remainder trusts are often thought of as the reverse of CLTs. Grantors can transfer appreciating assets, such as stocks or bonds, to a CLT, increasing their wealth throughout their lifetime while avoiding capital gains taxes. After the trust maker’s death, the investment income is transferred to the designated charitable organizations.

  1. Set up a Family Limited Partnership or Foundation

A family limited partnership allows you to retain control over your assets, reduce your estate value, and provide for family members. This option is great for high net worth families that own a business, for example, or own several investment properties. With a family limited partnership, you can name yourself the general partner to maintain authority over asset management and family members as limited partners.

Hire an Estate Planning Attorney Sooner Rather than Later

There are many tax loopholes high net worth individuals can leverage to keep the wealth they’ve worked so hard to build in the family; however many of these options can be complicated processes requiring lots of paperwork and legal know-how. Because we can never know when it’s our time to punch the clock, hiring a seasoned estate planning attorney sooner rather than later will ensure your wealth is protected. Lowthorp, Richards, McMillan, Miller & Templeman, APC’s estate planning group will work with you to create an overall strategy for maximum tax savings. Call today to get started: (805) 981-8555.

NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Cristian R. Arrieta, Lowthorp Richards McMillan Miller & Templeman, A Professional Corporation, 300 E. Esplanade Drive Suite 850, Oxnard, CA 93036