High Net Worth Estate Planning
If you are a high-net-worth individual, it’s essential to have a comprehensive estate plan in place. However, it cannot be easy to figure out which estate planning strategies are best for your circumstances. Here is an overview of some of the most common high-net-worth individuals’ strategies.
The Basic Tools for Estate Planning
Here are some of the most common estate planning strategies for high-net-worth individuals.
The Basic Tools for High Neworth Estate Planning
Here are some of the most common estate planning strategies for high-net-worth individuals.
A will is the first and most crucial estate planning document you should have. It’s also one of the least complicated, so don’t be afraid to start by drawing up your document.
A power of attorney allows you to appoint someone else as a legal representative in case you become incapacitated or incapable of making decisions for yourself (i.e., when you are mentally ill or physically impaired). The person holding this power can act on your behalf in all matters except those concerning medical treatment, which any other specific directives must approve (see below) that may exist.
A living will defines what medical treatments you want if doctors believe there is no chance of recovery from an injury or illness. This is particularly helpful for people who fear being kept alive artificially without hope of recovery, who want no heroic measures taken in an emergency, or who want their loved ones given more time with them before facing a devastating diagnosis-for; example: “I do not wish to be resuscitated after an initial heart attack/sudden cardiac arrest; I do not wish life-sustaining equipment used if I am permanently unconscious; I do not wish cryonic suspension performed on my body after death”)
High Networth Estate Planning Strategies
You can create an aging plan for yourself and your spouse. This should include:
a) making sure that you have the proper care arrangements in place should you need them
b) ensuring that your spouse has the proper care arrangements in place should they need them, and
c) planning for your children’s future care if something happens to both of you
If a child is disabled or unable to take care of themselves, it’s essential to plan for what will happen when they can no longer do so. Finally, it’s important to remember that as much as we love our children and grandchildren, they won’t always be around us-and neither will our spouses. So make sure there are provisions made should one party die before the other-this is especially true if there isn’t a will with specific instructions on how assets are distributed after death (see below).
Estate Planning Strategies for High Net Worth Individuals
Charitable Lead Trust
A charitable lead trust is an irrevocable trust. The trustee can donate the trust assets to charity and receive payments from the trust. The trustee may also use the trust assets to pay for the beneficiary’s expenses, but they cannot receive any other benefit from those payments. If all of these conditions are met, this arrangement is usually considered tax-free for both parties and therefore makes sense as part of your estate plan.
A spousal lifetime access trust (SLAT)
A spousal lifetime access trust (SLAT) allows a spouse to receive income from an estate during their lifetime. It allows the spouse to continue to live in the family home while they are alive, and it allows the spouse to receive income from the estate. It would be best if you funded the trust with assets in your name, such as securities, real estate, cash, and personal property. Once you die and your assets pass into this trust, you lose control over them permanently–they no longer belong to you, and you can’t use them for any purpose other than paying out income distributions.
Consider a Grantor Retained Annuity Trust
A GRAT is a legal instrument that allows you to make a gift of assets to your heirs while retaining the right to receive payments over the years. The amount of time you retain these rights depends on your age, how long you plan on keeping the GRAT in place, and other factors.
You create a trust by putting property into it to benefit another person or persons (called beneficiaries). There are several types of trusts; among them are living trusts, revocable trusts, irrevocable trusts, and grantor retained annuity trusts (GRATs).
The essential idea behind a GRAT is that you transfer property into this type of trust during your lifetime but give yourself certain rights over it. These include the right to receive income from that property until it’s paid back through distributions from your trust or paid off through interest earned by accumulating principal over time. When those terms expire or are met, whichever comes first, what remains belongs entirely to your chosen beneficiaries.
Leverage a Qualified Personal Residence Trust (QPRT)
Your primary residence is an asset you want to pass to your children, but you don’t want to pay gift or estate taxes (or any other complications) when you transfer the property. A Qualified Personal Residence Trust (QPRT) is a type of trust that allows you to transfer your primary residence to your children without paying gift or estate taxes.
It works like this: You transfer property ownership into a QPRT and receive annual payments for life from the QPRT. At the end of the trust term, all or part of what remains in the trust goes directly to your children and grandchildren.
The tax savings are enormous because no capital gains tax is due when real estate is transferred out of an owner’s name into a beneficiary’s name as part of a gifting strategy such as this one.
Generation Skipping Trust
The generation-skipping trust is a useful estate planning tool for people with a lot of money to pass on to their children. It allows you to transfer property to your grandchildren or other beneficiaries without paying the estate tax.
Unlike a traditional trust, which you must establish with a specific beneficiary, a generation-skipping trust can change anytime. For example, if you want your daughter’s children (your grandchildren) to inherit your wealth upon her death, but one day she has another child who would be more financially stable as an adult than her younger siblings (and thus better able to handle the responsibility), you can use this type of trust instead of naming them in your will.
Incapacitation planning is preparing for the possibility that you will suffer a physical or mental disability. Considering this possibility is essential because your loved ones may be unable to make financial and legal decisions for you without court intervention if you are incapacitated. Incapacitation planning can help prevent this and ensure that your wishes continue to be carried out even if you suddenly pass away.
The first step is identifying what kind of incapacity could harm your finances. Depending on how severe it is and whether it’s permanent or temporary, there are several ways to address this:
- Trusts can provide for essential caretaking needs after death (e.g., paying bills) while preserving assets until the beneficiary becomes legally competent.
- A power of attorney allows someone else to manage your finances, when necessary, either temporarily or permanently.
Qualified Terminable Interest Trust (QTIP Trusts)
A QTIP trust is a trust that allows you to make gifts now but retain control of the property in the future. It has benefits similar to charitable remainder trusts and bypass trusts. It can also be used as an estate planning tool for asset protection purposes. However, there are several drawbacks associated with QTIP trusts that should be considered before establishing one:
You can fund your QTIP trust with assets exempt from estate tax at your death-such as life insurance proceeds or appreciated property. You will only receive a step-up in basis on those assets instead of full capital gains treatment on their appreciation. This results in less income tax savings than if those assets were given away outright before death.
A QTIP agreement allows an individual who wishes to pass on assets at death without incurring federal estate taxes if their spouse survives them. This can help ensure that property passes directly from one generation to another rather than having its value increase over time as part of an estate that may eventually have to pay estate taxes when passed on by its owner upon death. Most importantly, though: How does this affect my children?
Grantor-Retained Annuity Trust
GRAT is a trust that pays a beneficiary a fixed amount each year for a set term. For example, if you transfer $1 million to the GRAT and choose to provide the beneficiary with payments over five years, the total value to be paid out would be $200k over five years.
All income is taxed only once – when it passes through from you to your beneficiaries (i.e., not double-taxed). The downside of this type of estate planning strategy is that if no growth occurs or there are significant losses after setting up the GRAT, no funds may be left at its end point – which means no benefit!
It’s essential when working with professionals like us who specialize in high-net-worth strategies so we can best advise how much risk makes sense given your goals and circumstances.
Qualified Domestic Trust (QDOT
QDOTs, or qualified domestic trusts, are irrevocable trusts that can be used to reduce estate and gift taxes. For a trust to qualify as a QDOT:
- The assets must be in the form of non-publicly traded property.
- The grantor (the person who creates the trust) must be a U.S. citizen or resident alien.
- No one other than the grantor may benefit from income or principal distributions from the trust during their lifetime, nor may anyone other than them take any action that could jeopardize such benefits after death (such as removing the property from it).
Work with an experienced estate planner.
An experienced estate planner can help determine which strategy is best for your circumstances. If you need help determining the best strategy, an experienced estate planner will be able to assist. An experienced estate planner can also help avoid common mistakes that can cost you money (or time) if you don’t take proper action to protect yourself and your family.
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- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT)
- Qualified Personal Residence Trust (QTIP)
- Learn more on estate planning.
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Contesting a Trust in California
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