Ultra High Net Worth

The Art of Estate Planning With High Net Worth

As the notorious artist warned us, more money always brings more problems. This is particularly true when making an estate plan. After all, who will inherit your wealth, business interests, investments, homes—everything it has taken you a lifetime to build? Here’s your chance to learn the most common pitfalls and how to avoid them straight from a high-net-worth estate planning attorney.

TABLE OF CONTENTS

Understanding the Complexities of Estate Planning for the Wealthy

High-net-worth estate planning is a world apart from the make-a-will, appoint-an-executor model. It’s a multifaceted endeavor that requires a thorough understanding of various legal, financial, and personal factors. The potential problems involved increase along with the size of the estate and the diversity of assets. That said, effective estate planning should include strategies to protect assets, address the future management of business interests, and prevent conflict that could result in legal battles. 

Trust Structures

Trusts are key to wealth preservation and are a cornerstone of estate planning for high-net-worth families. They provide a means to control asset distribution, minimize taxes, protect assets from creditors, and other purposes (depending on the type of trust).

Revocable vs. Irrevocable Trusts

A Revocable Trust allows you to keep control over the assets and make changes during your lifetime. However, these assets are included in the estate for tax purposes. On the other hand, Irrevocable Trusts remove assets from the taxable estate, providing potential tax benefits at the cost of relinquishing control.

Dynasty Trusts

These trusts last for multiple generations, effectively circumventing estate taxes for heirs. They allow families to retain control over wealth across generations while providing protection from creditors and divorce settlements.

Specialized Trusts

Other types of trusts can address specific goals. For instance, charitable trusts can provide income tax deductions while ensuring philanthropic goals are met. Qualified Personal Residence Trusts (QPRTs) can allow individuals to transfer a personal residence to heirs while retaining the right to live in the home for a specified period, thus reducing the taxable estate.

There are other specialized trusts that have a variety of acronyms that roughly describe what they accomplish. You might find combinations such as GRAT, IDGT, SLAT, CRUT, CRAT, BDOT, among others. Essentially, these are Irrevocable Trusts that serve planning purposes for estate taxes, income taxes, possibly capital gains taxes, asset protection, and wealth transfer. All these trusts serve specific purposes in an estate plan for high-net-worth individuals.

Business Interests

For many wealthy individuals, a significant portion of their wealth is tied to business interests. This presents unique challenges in estate planning.

Valuation and Liquidity

Proper business valuation is crucial, as it impacts tax assessments and equitable distribution among heirs. Unfortunately, valuing a privately held business can be complex and subjective—and if an estate includes a closely held business, liquidity can be an issue. Heirs may inherit valuable assets but lack the cash to pay estate taxes or to buy out siblings who may not want to remain involved in the business.

Succession Planning

Developing a robust succession plan is critical for ensuring business continuity. This involves deciding who will take over the management of the business, which can be fraught with family drama. Mechanisms such as buy-sell agreements can help facilitate a smooth transition, ensuring that remaining partners or family members can purchase the interests of a deceased owner.

Entity Structure

The structure of the business can also impact estate planning. For instance, S corporations and LLCs have specific rules regarding ownership transferability, which can affect how an estate is settled. Wealthy individuals must consider whether their business should be converted to a different structure, which can offer tax advantages or greater flexibility in estate transfers.

Tax Implications

A constant concern in estate planning for ultra-high-net-worth individuals is the potential tax burden upon death. The federal estate tax in the United States has a significant exemption threshold, which as of 2023, is approximately $12.92 million per individual. Careful planning is essential to minimize tax liabilities for those whose estates exceed this threshold.

Gift and Estate Taxes

Wealthy individuals can employ various strategies to reduce the taxable estate. For instance, making annual gifts up to the gift tax exclusion limit can lower the size of the taxable estate over time. However, this must be balanced with the desire to retain control over assets during one’s lifetime.

Generation-Skipping Transfer Tax (GSTT)

For estates that will pass wealth across multiple generations, the GSTT can impose additional tax burdens. This tax prevents individuals from skipping generations to avoid estate taxes. To navigate this, individuals may utilize GST-exempt trusts to protect assets and ensure they are not subject to this tax.

Income Tax Considerations

Beyond estate taxes, income tax implications must also be considered. The transfer of appreciated assets can trigger capital gains taxes. Wealthy individuals often consider strategies such as stepping up the basis of assets at death or utilizing charitable remainder trusts (CRTs) to mitigate these taxes. CRTs allow for a charitable donation while retaining income from the asset during one’s lifetime, providing both tax benefits and a way to support philanthropic goals.

Executors, Heirs, and Beneficiaries

Beyond the legal structures and instruments involved in your plan, there lies an often overlooked fallible element: people. Family, friends, employees, and even you are not immune from missteps that can cost you significantly down the road. A few preventive steps can steer you away from disaster.

Involve Family Members

Beyond the technical aspects of estate planning, the emotional and relational components are critical. Wealth can complicate family dynamics, leading to potential conflicts among heirs. Engaging family members in the estate planning process can foster understanding and acceptance of decisions made. This approach can also help identify potential conflicts early on and resolve them before the estate is settled.

Appoint Proxies with Care

You may have already decided who will serve as your executor when you pass away. However, you’ll also need to designate a financial power of attorney and a medical power of attorney to make decisions on your behalf if you become incapacitated. Otherwise, your business operations may stall if something unexpected happens to you.

Review and Revise

We’ve said it thousands of times, and we’ll keep saying it: review and update your beneficiary designations and estate plan regularly. Your estate plan should reflect your preferences after recent births, deaths, marriages, or divorces. 

The Importance of a Tailored Approach to High Net Worth Estate Planning

Your estate plan must be as unique as you are. Only you know what goals you want to accomplish, who you want to take over the business, and what legacy you hope to leave. At Yolofsky Law, we test-drive your plan to ensure the strategies we put into place are best for you and your family. Contact us today at [email protected] or schedule a 15-minute call to get answers to your questions.