Tax Planning for High Net-Worth Individuals and Families

Advanced tax planning aims to optimize minimizing taxes for high net-worth individuals, families and businesses. In the realm of finance and wealth management, high net-worth families often find themselves navigating complex tax landscapes.

Do You Need Advanced Tax Planning?

If you possess assets exceeding $5 million, the likelihood is high. Managing $5 million nowadays could simply involve owning a home and having a well-appreciated IRA. You may have unintentionally stepped into the realm of being "High Net-Worth" without fully recognizing it. Ultimately you probably do not grasp how this new status demands a completely different tax approach.

Families with substantial wealth, surpassing $50 million, have long acknowledged the necessity of Advanced Tax Planning. These families have consistently sought out top-tier advisors and attorneys to safeguard their wealth and devise optimal strategies for transferring assets to future generations.

For individuals with over $50 million, the necessity for a sophisticated strategy becomes evident. Affluent families have always been aware of the government looming nearby, poised to claim a significant portion, if not more, of their wealth. Nevertheless, certain elite planners may only engage with families holding assets exceeding $50 million.

"High Net-Worth" Families Sometimes Don't See the Need for Advanced Tax Planning

"High Net-Worth" families are families who typically have $5 million to $10 million in assets. They don't normally see themselves as wealthy, or having the need for Advanced Tax Planning. Too often, these individuals don't look into their IRA's and how they can impact their portfolios.

Because of this, these "High Net-Worth" individuals and families often get wrecked by state governments and the IRS. They typically don't ever even realize it because they don't feel the need to look ahead for the planning.

What Do We Mean by Advanced Tax Planning?

"Advanced" means protecting against high taxes using complex financial strategies used by extremely wealthy people in the past. This entails planning that goes beyond the typical, revocable Living Trust.

If your assets total $5 million or more, there's no reason you shouldn't have access to the same tax strategies as someone with $50 million. It's entirely feasible, and the advantages can be substantial.

However, "Advanced" also entails forward-thinking, extending well beyond the looming April 15th tax deadline. It involves considering tax implications five, ten, or twenty years down the line resulting from decisions made today—not just for yourself but for your entire family.

At Quraishi Law and Wealth, we do comprehensive estate, wealth and tax planning. This means that we look at what is best for you both now and into the future as well.

What Are Some Advanced Tax Planning Strategies?

Every family and individual's situation is different. Some might have a blended family. Some might own one business. Some might own 10 businesses. Some could have concerns for their heirs when they are gone or have concerns of long-term care costs. We could continue on and on with this list! This just means that no plan is one-size-fits-all. Your plan is going to look different from your neighbors plan.

Our advisors have your best interest at heart, learning and understanding everything about your situation, assets, goals and families to best plan for your future.

Here are a few of the strategies that could be right for your situation:

Charitable Trusts

A charitable trust is a legal arrangement where an individual (the grantor) sets aside assets to benefit a charitable organization or cause. In this trust, the grantor designates a charitable beneficiary to receive the trust's assets or income. Charitable trusts are established for philanthropic purposes, allowing individuals to support charities while potentially receiving certain tax benefits.

There are different types of charitable trusts, including charitable remainder trusts and charitable lead trusts. In a charitable remainder trust, the grantor can receive income from the trust during their lifetime, with the remaining assets going to the designated charity upon their passing. On the other hand, a charitable lead trust provides income to the charity for a specified period, after which the assets are transferred to non-charitable beneficiaries, such as family members.

Charitable trusts can offer advantages such as tax deductions for the grantor, the ability to support charitable causes, and in some cases, the potential for income for the grantor or their beneficiaries. These trusts are subject to specific rules and regulations to ensure that the charitable intent of the grantor is upheld.

Advanced Planning for Roth IRAs, Roth Conversion, and IRAs

While many grasp the fundamental concept of a traditional IRA—where pre-tax funds are saved and allowed to grow until retirement when withdrawals are taxed—knowledge often stops there. Surprisingly, few individuals, including a significant number of their financial advisors, conduct a comprehensive analysis, comprehend the tax implications, or adequately prepare heirs for inheriting IRAs.

A pivotal consideration is the Roth IRA—an exceptional investment tool that enables upfront tax payments, leading to the creation of a tax-free investment portfolio for both your lifetime and beyond. The long-term advantages of Roth IRAs are substantial, but it is crucial to discern when and how to opt for or convert traditional IRAs to Roth IRAs.

Navigating this decision involves intricate calculations, underscoring the importance of seeking expert guidance before embarking on one or more Roth conversions within a tax year. In certain scenarios, establishing an irrevocable IRA Trust may also prove beneficial for you and your beneficiaries.

Permanent Life Insurance Plans

Retirement accounts aren't the only source of advanced tax planning. You can also use permanent life insurance plans. By using a well-created policy with cash and letting it grow tax-free, then take well thought out loans from the policy, you can pass the benefit of it being tax-free over to your heirs. This is a complex process and does have a long timeframe to it, making it crucial to have a professional help.

1031 Exchanges

Purchasing and selling revenue-generating real estate assets necessitates a comprehension of 1031 exchanges. By invoking Section 1031 of the Internal Revenue Code (26 U.S.C. § 1031) when you dispose of a property, you can completely postpone your capital gains tax, provided you acquire a new property within a six-month period. If executed correctly, you can link transactions in a sequence to evade capital gains on real estate throughout your lifetime, all while reaping the rewards of progressively increasing incomes.

Gift & Estate Taxes

For individuals aiming to pass on an estate exceeding $3.5 million to their heirs, it is crucial to explore advanced strategies that safeguard the estate from inheritance taxes upon their demise. The threshold of $3.5 million is significant because of proposed reductions by policymakers from the current high of $13.61 million (per individual) to the $3.5 million range. By 2026, this threshold is projected to decrease to $7 million. If your current assets total $10 million or more, the necessity for action becomes pressing.

Here's a key insight known to affluent families: as a high net-worth individual, the objective is to maintain authority over assets and reap their benefits during your lifetime, irrespective of formal ownership. To mitigate both your taxes and those of your heirs, it may be prudent to transfer ownership (while retaining control) to your heirs while you are alive, ensuring they benefit appropriately upon your passing.

Picture yourself as the owner and driver of a grand bus with your family as passengers. Initially, you own and drive the bus, hence controlling and owning it. Now, envision transferring the ownership documents to your children while your role as the driver remains unchanged. Despite your children owning the bus, you continue to operate it—an enduring practice among wealthy American families for generations.

The forthcoming methods detailed involve techniques to operate the "bus" without owning it outright. This often entails establishing various irrevocable trusts, Family Limited Partnerships (FLP), partnerships, and Family Limited Liability Companies (LLCs). These mechanisms differ significantly from the conventional Living Trust, which is revocable and where the grantor remains the taxpayer.

It's crucial to note that each tool mentioned is tailored to specific circumstances and is by no means universally applicable.

Beat the Federal Thresholds

People with large estates face estate taxes, or "death taxes," of 40% or more depending on the state they live in. As of 2024 federal law, a person is allowed to pass up to $13.61 million the someone without estate taxes. This would also equal $27.22 million per couple. While you are alive, you are able to gift up to $18,000 per recipient, tax-free.

Here are some methods that can be used to beat the federal thresholds:

Dynasty Trust

A Dynasty Trust is a type of irrevocable trust designed to allow assets to grow and transfer across multiple generations while minimizing estate taxes. Unlike revocable trusts, which can be altered or revoked by the grantor, a dynasty trust is typically meant to exist for several generations without changes. Dynasty Trusts can continue for multiple generations, often in perpetuity, allowing wealth to pass down without being subject to estate taxes each time it transitions to a new generation. By transferring assets to a Dynasty Trust, the grantor can minimize gift, estate, and generation-skipping transfer taxes. The trust's assets can grow and be distributed to beneficiaries without incurring additional estate taxes in the future.

Intentionally Defective Irrevocable Grantor Trust (IDIGT or IDGT)

An Intentionally Defective Irrevocable Grantor Trust (IDIGT or IDGT) is a sophisticated estate planning tool used to transfer assets outside an individual's taxable estate while still allowing the grantor to retain certain control and benefits associated with the assets.

The term "defective" in its name refers to a specific tax status under the Internal Revenue Code. It implies that for income tax purposes, the trust is treated as a grantor trust, meaning the grantor is responsible for the income taxes generated by the trust assets. This unique status can be advantageous as the grantor's payment of trust taxes effectively reduces their taxable estate.

The grantor is usually the individual who establishes the IDGT and is typically responsible for paying income taxes on the trust's earnings. This tax treatment allows the trust assets to grow tax-free, and the grantor's payment of trust taxes further reduces the grantor's taxable estate. By transferring assets to an IDGT, the grantor can leverage gift tax exemptions and remove appreciating assets from their estate, ultimately reducing estate taxes upon their passing.

Spousal Lifetime Access Trust (SLAT)

Spousal Lifetime Access Trusts offer a unique opportunity for one spouse to transfer assets (up to $13.61 million) to an irrevocable trust for the benefit of the other spouse. The spouse who transferred the funds will have indirect access to the trust assets through the beneficiary spouse. The beneficiary spouse can access the trust assets and receive distributions during their lifetime, providing financial support and flexibility. This access distinguishes SLATs from more restrictive irrevocable trusts.

Irrevocable Gifting Trusts

Every individual can give $18,000 per person in one calendar year without having to file a Form 709 Gift Tax Return. If you are wanting to give more than that, a Irrevocable Gifting Trust could be a good idea. By transferring assets to an Irrevocable Gifting Trust, the grantor can utilize their gift tax exemption and remove the gifted assets from their taxable estate. This can be a tax-efficient way to transfer wealth to beneficiaries while potentially minimizing gift and estate taxes.

GRATs, GRITs, and Private Annuities

A Grantor Retained Annuity Trust (GRAT) is an incredibly effective mechanism for reducing taxes on substantial monetary gifts to family members. It's a short-term trust set up to distribute profits from an investment that's anticipated to appreciate quickly.

A Grantor Retained Income Trust (GRIT) is utilized to lessen taxes on significant financial gifts to distant relatives like nieces and nephews (excluding your children), while you also reap benefits.

A Private Annuity is a contract in which a person transfers property to an "Obligor" (likely your child), and the Obligor commits to making payments to the Obligee (Annuitant – you) according to a predetermined schedule.

Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust is a trust specifically designed to own a life insurance policy on the grantor's life. The ILIT is the owner and beneficiary of the life insurance policy, removing the policy proceeds from the grantor's taxable estate. By placing the life insurance policy within an ILIT, the death benefit is not subject to estate taxes, providing a tax-efficient way to pass on assets to beneficiaries.

Entities - FLPs and LLCs

Wealthy families use FLPs and FLLCs to pass assets to children while maintaining control. This strategy can lower Gift Tax by restricting the sale of gifted shares and income demands. LLCs can be passed down through generations for tax management, but it is a complex subject. Consider exploring this option further for your family's financial planning.

This can help reduce Gift Tax because the shares gifted cannot be sold and the holder cannot demand income. LLCs can be passed down through generations to manage taxes, but this is a complex topic. It may be worth exploring further for your family.

Contact Us Today About Advanced Tax Planning

If you believe your family could benefit from Advanced Tax Planning, please contact us. We can take a look at your current situation and make suggestions based on what we see. We're here every step of the way. Call our office at 870-275-4304 to schedule an appointment.

Image Credit:  Tax Planning Stock photos by Vecteezy