Estate planning can be tough and very challenging, especially if you’re a high-net-worth individual. Not only are the nuances of estate planning fairly complicated, but things in the industry are also constantly changing, which often makes it difficult to keep up.
From tax laws to tax liabilities to other issues that affect the family, there are so many things you have to consider. Some of the goals of high-net-worth individual include protecting inheritances for heirs, minimizing estate taxes, avoiding the probate process, and appointing the right trustee.
First things first: Make sure you hire someone to take care of your estate planning needs. Unfortunately, there are some professionals who don’t act in the best interest of their clients. They may opt for a route that provides them with the most income opportunity, rather than suggest ways to reduce your costs and guarantee that assets end up in the right hands. But how do you know whether you can trust your trustee?
Do your research and find someone who will work for and with your needs. Be sure to ask questions, seek out and read reviews, and discuss all your estate planning goals with the person you choose to represent you. The information below should be seen as a starting point for choosing the right estate planning attorney or trustee.
One of the many goals working people have is to save up for retirement and to build wealth to leave their loved ones after they die. But doing so often comes at a price. There are taxes to consider, which, if you don’t make the right choices, can deplete the amount of your estate.
You should consider every kind of tax scenario while you plan your estate. This includes income taxes, gift taxes, estate taxes, and generation-skipping taxes. When you exclude income taxes, the remaining three are referred to as wealth transfer taxes. Federal taxes are 40% of the value of whatever is being measured for each type of tax within that group. Keep in mind that it is possible that your state also imposes taxes, so you should check with your state to find out.
Gift and estate taxes generally change each year for inflation. But the passing of the Tax Cuts and Jobs Act (TCJA) in 2017 increased the exemption for gift and estate taxes—together called a unified credit—altogether. The exemption is:
Anything above that amount is taxed at 40% of the gift’s value.
You are allowed to give a gift of $15,000 per year per person ($16,000 in 2022), and there is no limit to the number of recipients you have. For example, if you give someone a gift of $25,000 in 2021, the first $15,000 (or $16,000 in 2022) is exempt. This is referred to as an annual exclusion gift. Any remaining amount you give to someone is subject to a gift tax.
The same rules apply to estate taxes, but the $11.7 million estate tax exemption for 2021 is reduced by the value of the gifts you give throughout your lifetime. So if you gave $3 million worth of gifts using the lifetime gift tax exemption, then your estate tax exemption will now be $8.7 million.
Generation-skipping transfer taxes are paid any time you give property to a grandchild or great-grandchild. Once again, you pay tax based on 40% of the value of the gift(s), and there is a tax exemption of up to $11.7 million for 2021 or $12.06 million for 2022. Just in case you’re wondering, this tax exists so grantors (creators of a trust) don’t bypass the next generation in order to avoid tax obligations.
If you worked your entire life to save for retirement and to pass on an inheritance, you’d be furious if it dwindled or was wiped out. Let’s avoid that situation. In case you become incapacitated because of an accident, illness, or from aging during your lifetime, you want to make sure you:
To accomplish these goals, you will need to make sure certain steps are taken.
Many estate planning attorneys will try to lead you toward a traditional will. Why? Because they benefit more than they would if you had a living trust. Be wary of estate planning attorneys who try to sell you on the idea that a living trust is more expensive and not a better option than a will. A living trust is more expensive upfront, but not over the long haul. If you want to avoid unnecessary costs, you need to avoid the probate process.
In order to accomplish this goal, you simply need to opt for a living trust instead. Since it’s a trust, not everything will be in your name, which means you can bypass probate. Despite not everything remaining in your name, you still have control of your assets while you’re alive. Remember, you can appoint a successor if you become incapacitated.
A living trust offers other advantages as well. If it’s a revocable trust, then it can be amended, modified, or revoked at any time. A revocable trust also qualifies as a grantor trust, which allows you to move assets in and out of the trust without paying taxes. If you’re concerned with how a beneficiary will behave with their inheritance, you can set limitations. For example, you can set a limitation that the beneficiary will only be able to use the inheritance for health or education purposes. You can also appoint an independent trustee who will have to approve all distributions.
To guarantee your assets end up in the right hands, be sure to create a specially designed trust where the shares of the trust will remain in the trust’s name and transfer to each heir when you die. This disallows a spouse from transferring assets to their children from a previous marriage. It will also disallow that spouse from transferring assets to a new spouse. Additionally, this kind of trust will protect your heirs from creditors and bankruptcy.
Estate Planning can often feel like a monumental task when you are already trying to juggle your daily responsibilities. However, with so many unknowns regarding the future, you will want to make Estate Planning a top priority now before it is no longer an option. People with a high net worth will have a sizable share of finances and assets to account for, and you will want to make sure they end up in the right hands before it is too late.
If you are an individual with a high net worth, it will be very important for you to choose your Financial Power of Attorney wisely. Your Financial Power of Attorney documents will legally dictate who you have designated to be in control of your finances when a situation arises in which you cannot be responsible for them yourself, such as when your health prevents you from being capable of making decisions. In these instances, it will be beneficial to have a trusted individual with the authority to be your Power of Attorney. With a high net worth comes more complicated financial decisions, and you will want to choose the right person for the job in your absence.
When you have a high net worth, it is often more likely that people will enter your life in the hopes of taking advantage of your wealth. This means that you may have to be more cautious with the new people entering your circle to make sure they are choosing to be in your life for the right reasons. This level of care will also want to be used when picking your Power of Attorney to ensure that your finances end up in trustworthy hands.
When you are Estate Planning and deciding on inheritance for friends and family for when you pass away, consideration needs to be taken into account for state and federal taxes regarding inheritance. Looking into these tax laws will be exceedingly important when you are a high net worth individual because it is more plausible for you to reach the tax exemption limit on inheritance for family and friends, which may make you want to evaluate your inheritance plans.
At the federal level, once your estate inheritance reaches past $11.70 million, those receiving your estate inheritance will be subject to paying federal estate taxes on the inherited assets. This is just one example of the different tax laws you will want to make yourself aware of at the federal level, and it may be that your state has additional tax laws on inheritance. This can often lead high net worth individuals to gift or donate portions of their assets as they get older in order to avoid some of these taxes, an option that you may want to consider.
The Last Will and Testament is a tool that allows one to bequeath assets to specific individuals and/or entities, name guardians for your minor children and potentially prevents your property and children from being distributed under the state’s default intestacy statutes. Unfortunately, many Utah residents are unaware that the Last Will and Testament can neither prevent the expense, delay, and publicity of a probate preceding nor can the Will override a beneficiary designation on a life insurance policy, retirement plan, or a joint form of ownership. Therefore, the estate planner should be aware of all retirement plan beneficiaries, insurance policy beneficiaries, joint accounts and review whether a living trust should be drafted in addition to the Last Will and Testament.
Failure to complete basic estate planning documents can cause a whole host of problems for those you leave behind. Dying intestate (without a will) means that your assets will be divided according to state law rather than your own personal wishes. It also means that the state government will get involved and charge a fee for services rendered. In other words, less of your estate will go to your heirs. If you want to avoid this unpalatable scenario, you must have several important documents in place before you pass away.
As a high net worth individual, you will also want to create a Living Trust, which is when you create a legal relationship with an individual, also known as your Trustee, who will become responsible for your assets in the event that you cannot take care of them yourself. This is a beneficial legal document to create as a high net worth individual because it is likely you have a large portion of assets that you will want to make sure are protected and end up in the right hands once you cannot oversee them yourself. With a living Trust, you can guarantee that your assets will be protected.
High net worth individuals can often find Estate Planning a confusing and time-consuming process, as you have more assets to account for than the most people. Ascent Law Firm knows how time consuming and confusing Estate Planning can be, and for this reason is determined to simplify the process for you.