Protecting Your Estate: A Guide To Estate Tax Planning For High-net-worth Individuals

Apr 15, 2023

Estate planning should be a priority for every adult, no matter their personal and financial background. There are so many tools that any individual can use to benefit their loved ones after they pass or benefit themselves while they’re still alive and no longer able to care for themselves. Although not every family or individual will need each available tool, estate tax planning for high-net-worth individuals requires a deeper level of understanding to save on taxes and avoid probate.

Taxes Come In Many Forms

For many individuals, wherever they start their journey, they commonly don’t want to spend a single penny of their hard-earned money on the administrative costs of probate or inheritance tax. These added costs when transferring assets after death can place a significant financial burden on your beneficiaries. Building an incredible nest egg without certain protections means it will crack before it gets to your intended loved one. For example, federal and state estate tax laws may take a percentage of the assets as a form of estate tax.

In Washington, the estate tax applies to estates worth $2.193 million or more. Estate tax rates in Washington state are progressive and range from 10% to 20%, whereas Oregon has a threshold of just over $1 million, and the federal threshold is close to $12 million. That means that if your estate is valued just above $1 million but under the federal threshold, then your beneficiaries will owe a graduated estate tax to Oregon. If your Oregon-based estate is above the federal threshold, your beneficiaries will owe estate taxes to both Oregon and the federal government. The higher the value of your estate, the higher the tax percentage becomes.

estate tax planning for high net worth individuals

Estate Planning Strategies

The end goal for many hard-working and high-net-worth individuals is to give their families the benefit of enjoying the fruits of their labor even after they’re no longer physically there to provide for them. Creating comprehensive and effective estate plans works well for anyone, regardless of their net worth. Here are some examples of ways to minimize estate tax liability and maximize the amount left to your heirs:

  • Trusts: Trusts come in many forms, prime examples of which include revocable and irrevocable trusts. Instead of bequeathing a large sum of money or assets to individuals, they can be protected within a trust, and heirs can be outlined as beneficiaries. There are several ways to structure trusts, but it’s a common example of how to minimize estate tax liability.
  • Gifting: Gift funds are a way to reduce the overall size of an estate and transfer wealth to individuals or entities without fear of being taxed. This is still somewhat complicated as there is a maximum amount each individual can receive each year, and there is a lifetime limit on untaxable gifting that is subject to change with evolving policy.
  • Family Limited Partnership (FLP): This is used in situations where high-net-worth families have substantial assets like investment properties. It is sometimes advantageous to create an FLP to reduce estate taxes and protect assets under the FLP.

These are just a few primary examples of common estate tools that can be used to reduce tax liabilities for beneficiaries. It’s important to note that a comprehensive estate plan may include a combination of estate planning tools to best suit the needs of the estate. Working with an estate planning firm with a team that is experienced in handling the legal needs of high-net-worth estates is the best way to maximize the value of your estate without compromising. Contact White Oak Wills & Trusts to schedule a consultation today at ​​(503) 928-8664.

The Pillars of Asset Protection for High-Net-Worth Individuals

In the realm of estate planning, safeguarding assets against unforeseen threats and liabilities is paramount, especially for high-net-worth individuals. The utilization of Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs) emerges as a strategic bulwark in this endeavor. FLPs serve not only as a vehicle for minimizing estate taxes but also as a fortress protecting assets from creditors and legal disputes. By allowing the family to retain control over assets while distributing income among members, FLPs offer a dual advantage—tax efficiency and asset protection.

Similarly, LLCs are instrumental in estate planning, providing a flexible structure for asset management and protection. They shield personal assets from business liabilities, thereby ensuring that the individual’s wealth is safeguarded against potential business downturns or litigation. This separation of personal and business assets is crucial for high-net-worth individuals who seek to maintain their financial integrity and legacy.

According to a study by the American Bar Association, the strategic use of LLCs and FLPs can reduce estate tax liability by up to 40%, highlighting the significant financial benefits of these structures. Moreover, these entities allow for the efficient transfer of wealth to subsequent generations, ensuring that the legacy of the individual endures beyond their lifetime.

Advanced Estate Planning Tools: ILITs, GRATs, and QPRTs

estate tax planning

Irrevocable Life Insurance Trusts (ILITs): An ILIT is a powerful tool for high-net-worth individuals aiming to exclude life insurance proceeds from their taxable estate. By transferring ownership of a life insurance policy to an ILIT, the proceeds can be shielded from estate taxes, providing beneficiaries with a tax-free inheritance. This strategy not only preserves the value of the estate but also offers liquidity to cover estate taxes and other expenses without the need to sell off assets.

Grantor Retained Annuity Trusts (GRATs): GRATs are an effective vehicle for transferring asset growth out of an individual’s estate at a minimal gift tax cost. The grantor contributes assets to the trust and receives an annuity payment for a specified term. If the assets grow at a rate higher than the IRS’s assumed interest rate, the excess growth passes to the beneficiaries tax-free. This tool is particularly useful for assets expected to appreciate significantly, allowing for substantial tax savings and wealth transfer to the next generation.

Qualified Personal Residence Trusts (QPRTs): A QPRT allows an individual to transfer a personal residence to a trust while retaining the right to live in the home for a term of years. After the term expires, the residence passes to the beneficiaries, usually the grantor’s children, at a reduced gift tax value. This strategy not only lowers the estate’s taxable value but also secures a legacy asset for beneficiaries at a fraction of its potential future value.

Incorporating ILITs, GRATs, and QPRTs into an estate plan can significantly enhance tax efficiency and asset protection. Each tool requires careful consideration of the individual’s financial situation, goals, and potential tax implications. Consulting with an experienced estate planning attorney is essential to navigate the complexities of these strategies and ensure they align with the overall estate planning objectives.

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