We are an Estate Planning law firm serving Phoenix, Arizona and the surrounding areas, contact us if you have questions about Estate Planning Strategies for High Net Worth Individuals or Families.
What Is Estate Planning
Estate planning is a lifelong process everyone ought to partake in. More than just a set of documents, it’s a comprehensive plan to preserve your legacy, prevent acrimony, reduce taxes, and more. While everyone benefits from estate planning, it is highly recommended that high net worth individuals invest in planning their estate for the simple fact that they have much more to lose and gain.
At What Point Are You Or Your Family Considered High Net Worth?
Figuring out if you’re a net worth individual or family is a complicated question with no universally agreed upon definition. However, it is generally agreed upon that the high net worth threshold only considers liquid assets. Liquid assets include: stocks, bonds, certificates of deposit (CDs), securities held in brokerage accounts, bank accounts, cryptocurrency, and other assets you can easily convert into cash – this excludes hard to sell assets such as real estate, collectibles, cars, or other hard to sell tangible property.
According to Forbes, as of 2021, financial professionals generally classify families into three categories of high net worth individuals.
- High-net-worth individuals (HNWIs): People or households who own liquid assets valued between $1 million and $5 million.
- Very-high-net-worth individuals (VHNWIs): People or households who hold liquid assets valued between $5 million and $30 million.
- Ultra-high-net-worth individuals (UHNWIs): People or households who own more than $30 million in liquid assets.
Why Is Estate Planning A Must For High-Net-Worth Individuals?
If you are a high net worth individual, estate planning is a need, not a want. High net worth individuals are more likely to use up their lifetime exemptions and their loved ones will face the inheritance tax, gift tax, or the generation skipping transfer (GST) tax. The consequences of a poor plan or no plan are greater. High net worth families and business owners simply have too much at stake to let the government decide their estate plan. Without proper tax planning, heirs will face massive tax bills which could have been avoided.
Not only are there tax planning opportunities high net worth families might miss out on, but without a proper estate plan, high net worth individuals will miss out on a myriad of opportunities for asset protection strategies. Asset protection strategies may not sound particularly attractive, but that’s exactly why we purchase insurance. Think of an asset protection trust as a form of insurance against: unforeseen disaster, unforeseen creditors, divorce, incapacity, etc. With a proper estate plan in place, your heirs can be insulated and protected from financial catastrophe.
What Are The Estate Planning Strategies For High-Net-Worth Families?
- Last Will & Testament – Every estate plan includes a last will and testament. This document represents your final wishes. It also functions as a backstop in case there are any problems with the validity of your living trust.
- Guardianship Designations for Minor Children – These designations are included in your will and nominates guardians for your minor children.
- Minor Children Wealth Planning – Wealth transfer planning for minor children is a complex endeavor. You can’t actually leave money to minors as they are deemed legally incompetent. Likewise, it’s usually not wise to give large amounts of wealth to immature family members if you’d like future generations to benefit from your hard work.
- Trusts – Trusts form the backbone of a high net worth individual’s estate plan. Starting with the revocable living trust, which helps avoid probate, to more advanced tax planning strategies such as a GRAT (grantor retained annuity trust), QPRT (qualified personal residence trust) or ILIT (irrevocable life insurance trust), the trust is the tool used to reduce your tax liability, stave off the IRS, and ensure intergenerational wealth.
- Trustee Selection Planning – Just as the trust is the backbone of a wealth transfer plan, trustee selection will make or break the trust. Who you trust (financial advisors, estate planning attorneys, or your partner) is critical to the success of the trust. Your trustee should be competent, trustworthy, and able to make hard decisions. In addition to the initial selection, we will help you plan for future trustee selection issues.
- Tax Planning – The IRS is out to get us. Whether it’s the gift tax, inheritance tax, generation skipping transfer tax, or the lowly income tax, the IRS wants your wealth. Through the use of a variety of tax minimization strategies such as charitable giving to nonprofits, private foundations, or the disclaimer trust we can help high net worth individuals or married couples reduce their tax burden.
- Gifting – Even lifetime gifting isn’t tax free. The IRS allows for an annual exemption of $16,000 in 2022 ($17,000 in 2023) until the gift tax is imposed on gifts above that amount. It is important to retain qualified legal advice regarding your estate planning needs so as to ensure you do not run afoul of any of the IRS’s arcane rules such as the step transaction doctrine.
- Charitable Gifting and Philanthropic Goals – It is quite common that high-net-worth individuals desire to leave all or a portion of their wealth to charitable groups or private foundations. This can be accomplished a few different ways in the estate planning process. The simplest method is to directly donate or name a charity as a beneficiary of your estate. Alternatively a charitable lead trust (CLT) or charitable remainder trust (CRT) are charitable donation options with tax planning advantages. Some tax benefits from giving to charities include a reduction in capital gains tax, income tax deductions, tax deferrals, and reduced estate tax.
- Life Insurance – Life insurance is a helpful way to provide liquidity when a closely held business or other hard to sell asset is passed on. It’s frequently used in buy/sell agreements so that one partner may buy out the other’s estate. It can also be used to defer taxes or as part of a series of lifetime gifts held within an ILIT (irrevocable life insurance trust).
- Incapacity Planning – Unfortunately, incapacity is an all too likely scenario for most of us. But it needn’t be fatal to your estate plan. By planning for incapacity, you can rest assured that even if the worst case scenario happens, you and your plan will be well taken care of. The tools used for incapacity planning include: revocable living trust, financial power of attorney, and healthcare power of attorney.
- Financial Power of Attorney – The financial power of attorney allows a trusted agent to act on your behalf financially. You need not be disabled, but most people use this document as a “break in case of emergency” plan. By having a financial power of attorney in place, you can avoid a costly conservatorship and maintain your rights in case of incapacity.
- Medical/Healthcare Power of Attorney – A medical power of attorney or healthcare directive in Arizona, allows a trusted person to make medical decisions on your behalf. Decisions such as choice of provider, which assisted living facility, and whether to continue on life support. The Arizona Healthcare Directive is designed to prevent the Terry Schiavo scenario. It will clearly lay out your wishes in case of permanent incapacity. It will also prevent unscrupulous heirs from sending you to the worst nursing home possible.
- Living Will – The living will is a document which instructs your healthcare agent on which end of life choices you would prefer.
- Health Insurance Portability Accountability (HIPPA) Authorizations – A HIPPA authorization is a legal document which gives your medical professionals permission to share your healthcare records with your trusted persons.
Other Estate Planning Tips for High Net Worth Families
- Learn The Tax Laws In Your State – Every state is different in its calculation of taxes on your estate, generation-skipping transfers, gifts, inheritance, and income. To mitigate and navigate the tax requirements in your state when transferring your wealth, the best option is to contact a knowledgeable estate planning attorney. An estate planning lawyer know which taxes apply and how to mitigate and minimize those taxes.
- Asset Protection for High-Net-Worth Individuals in Arizona – Don’t lose your life’s work to a lawsuit or creditors. Your asset protection strategy should be multi-faceted and include several layers of protection. Asset protection trusts, liability insurance, limited liability companies or partnerships, and corporations are some of the options. After we carefully review your financial situation and lifetime goals, we can present a comprehensive plan for protecting your assets and ensuring your legacy.
- Business Succession Planning – Did you know that most family businesses fail to survive the first generation? Many high net worth individuals own a business interest and many partnership and operating agreements are silent on very important issues related to business succession.. We can help you review your corporate bylaws, operating agreement, or partnership agreement and craft a comprehensive plan to ensure a smooth transition for your heirs and the business.
Estate Planning Pitfalls To Avoid
1. Not having an estate plan or understanding your estate plan
If you don’t have an estate plan, you’re left with the default state plan. For high net worth individuals, this is a rubbish plan and could be easily avoided for a tiny fraction of your net worth. The other common pitfall is not understanding the plan you’ve been given. Complex asset protection and tax minimization plans require constant oversight to ensure they work properly when the time comes.
2. Not updating your estate plan
Our families are constantly evolving; new members are born and others are lost; children grow up and become the responsible or irresponsible adult they’re going to be. Your estate plan ought to change with the times in order to stay relevant and most impactful.
3. Not updating your fiduciaries
Fiduciaries are the people you trust with your plan and assets. Your trustee and executor are fiduciaries. We entrust these people to manage our assets, make distributions fairly, and file taxes. As we age, the people who surround us change. It is important to update our named fiduciaries in case they are no longer fit to fulfill the duties we’ve asked of them.
4. Not funding or underutilizing your trust
A large problem in estate administration is an unfunded trust. If you don’t fund the trust you created, the trust is at best worthless, and at worst a pain for your personal representative. In addition, if you never transfer the stocks, bonds, contract agreements, deeds, cryptocurrency, etc into your asset protection trust, those assets will not be protected. The same goes for trusts designed to mitigate against the estate tax.
5. Not considering changes to the tax laws
The tax laws are constantly changing. New cases and new rules come out every month. Every ten years or so, congress changes the tax laws. It is a constant arms race between high net worth individuals and the lawyers who help mitigate their tax burden.
6. Not keeping your family and fiduciaries in the loop
While having a good estate plan in place is usually sufficient, letting your family and fiduciaries know what the plan is and how you’d like it executed is important as well. The death of a loved one is a chaotic affair. If you don’t communicate the plan in advance, there may be confusion amongst those who you’ve trusted to execute the plan. Have regular conversations with your family, beneficiaries, and fiduciaries so that they know what assets and in what accounts you hold in addition to how your estate plan is structured. When everyone understands the plan, there should be no surprises, confusion or infighting over your estate.