We know estate planning isn’t a particularly fun process. But believe us when we say it’s way more enjoyable than what happens if you don’t estate plan — probate.
For high net worth individuals and their families, the probate process is even worse than usual. That’s because the more assets, the more expensive probate is. And the more complex the estate, the longer it takes.
So it’s critical that high net worth individuals create and maintain a thorough estate plan to protect themselves, their assets, and their loved ones.
Do incapacitation planning
We’re going to start in a place that might surprise you — incapacitation planning.
Why? We’re starting here because people often overlook incapacitation planning when they’re thinking about estate planning. They know they need a will or maybe a trust for when they die.
They don’t consider — perhaps because it’s understandably painful to think about — that some people experience long periods of incapacitation or dementia at the end of their life.
Planning for potential incapacity is critical for everyone and especially so if you’re a high net worth individual. The financial decisions someone may need to make on your behalf are likely more complex than the average person’s. You also may be at higher risk of fraud or financial mismanagement.
You’ll need these documents in place to ensure two things: (1) that your assets are safe and well-managed and (2) that your end-of-life medical care proceeds according to your wishes.
- Durable power of attorney
- Advance directive for health care
- HIPPA authorization
Set up a living trust
Now moving on to the parts you were expecting: how to distribute assets to your heirs.
The best estate planning vehicle for high net worth individuals is a living trust. A living trust is a legal agreement between the Grantor (the person who creates the trust) and the Trustee (the person who manages the trust) on behalf of the Beneficiary (the person who ultimately receives the funds in the trust).
Your estate plan may include multiple trusts, including both revocable and irrevocable trusts.
A revocable living trust is active while you’re alive, so most people serve as both the Grantor and the Trustee during their lifetime. They appoint a Successor Trustee to take over management of the trust when the Grantor dies or becomes incapacitated. That way, the Grantor can maintain control of the funds while they’re alive and make changes as necessary.
Revocable living trusts are helpful for avoiding probate and automatically transferring assets. However, they don’t usually provide any tax benefits.
Irrevocable living trusts, which can’t be revoked once they’re created, can be used to reduce your tax liability. Depending on your circumstances, you might set up a charitable trust, a bypass trust, or a generation-skipping trust (or a mix of several). Talk to your estate planning attorney about the specific trust that best suits your situation.
Benefits of a revocable living trust
- Avoid probate. Probate can be a long process for your heirs. The larger and more complex your estate is, the more time-consuming and expensive the probate process is. Assets that are placed into a trust don’t have to go through probate, so you save your heirs that inconvenience and expense.
- Maintain privacy. The probate process is public, so avoiding probate helps maintain you and your loved one’s privacy.
- Protect minors. In a will, you can’t control exactly when and how minors receive their inheritance. A trust allows you to create a specific structure for the dissemination of assets.
- Ease transition. Whether because of death or incapacity, a trust ensures that the Successor Trustee can step right into the role of managing the trust without court involvement.
See: Estate and succession planning for family businesses
Choosing a successor trustee
Because your Successor Trustee will have significant authority, it’s important to choose them carefully. You’ll want someone that has time to perform the role, someone that you trust, and someone with the right temperament to deal with potential conflict.
Some people use a professional trustee for continuity as well as to avoid family among family members.
See: How to Choose a Successor Trustee
Pay attention to tax laws
Many individuals and families don’t need to think much about estate tax laws because their estate value remains under the estate tax exemption. However, as a high net worth individual, yours may exceed the exemption.
In 2022, the Tax Cuts and Jobs Act increased the lifetime federal gift and estate tax exemption to $12.06 million per individual ($24.12 million for married couples). If your estate exceeds that amount, your heirs will be required to pay federal estate taxes on their inherited assets.
Georgia doesn’t currently have an estate tax, but federal estate tax laws change regularly. So it’s important to stay up to date. Certain strategies can help you minimize the federal estate tax burden that will fall on your heirs.
Gifting strategies
One of the most common strategies for minimizing your estate taxes is to provide financial gifts to your loved ones during your lifetime.
As of 2022, you can gift up to $16,000 per year without tax consequences. That’s the total amount you can give to an individual, regardless of how many people you give it to. If you have a spouse, you can give a joint gift of up to $32,000 per person. If you give above the yearly limit, a gift tax return is required to be filed and the overage may eventually be taxed at a rate of 40%.
Making charitable donations can also reduce your estate tax burden. There are a few ways you can do that:
- Most simply, you can name a 501(c)(3) as a beneficiary of your estate. Any amount donated to a charity is not taxable.
- You can include stipulations that allow your beneficiaries to disclaim their inheritance and donate it to a charity instead.
- You can establish a charitable remainder trust, which allows you to donate a large sum of money now, receive an income tax deduction for it, and continue to receive income from the trust while you’re alive. Any remaining funds in the trust when you die will transfer to the charitable beneficiary.
- You can set up a charitable lead trust. With this type of trust, the charity receives a regular income stream while you’re alive, and the remainder goes to your heirs after you die.
Maintain life insurance
In general, the death benefits from a life insurance policy are not subject to income tax. However, they can be included as part of the estate and thus subject to estate tax.
Some individuals avoid this potential tax liability by placing their life insurance policies in an irrevocable life insurance trust (ILIT). Because the trust holds the life insurance policy (rather than the individual), the death benefits can pass automatically.
See: The Importance of Updating Your Beneficiary Designations
We work with individuals and families to design estate plans that balance flexibility now with asset protection later. And we always ensure that our clients have incapacitation plans in place. Contact us to schedule a phone or zoom consultation today.
