How HNW Families Can Conquer the Estate Tax

How HNW Families Can Conquer the Estate Tax

Careful planning now will ensure your estate remains intact for future generations.

One of the most important considerations in wealth management is charting a course for your wealth after you’re gone. You want assurance that it will pass on to future generations, along with the values that helped you build it.

A key factor in this is navigating the estate tax, a complex and sometimes overwhelming concept that can have a significant effect on High Net Worth (HNW) individuals and families. But fear not, below we take the mystery out of estate tax planning, providing a comprehensive exploration of strategies that will give you the tools you need to manage your estate tax liabilities, safeguard your wealth, and ensure a smooth transition of assets to future generations.

A guide to estate tax regulations

To make informed decisions about the estate tax, it’s crucial to understand the regulations behind it. Here is a brief summary of what you’ll need to know:

• The federal estate tax applies to the inherited assets of a person who has passed away. It’s also sometimes referred to as the “death tax” and ranges from rates of 18% to 40% and typically applies only to assets valued over $12.92 million in 2023 and $13.61 million in 2024, up from $12.06 million in 2022. So, if in 2022 your estate was valued at $12.5 million – just slightly above the $12.06 million limit – the total taxable estate would be $440,000.
• This exemption is per individual. A married couple’s exemption can double to $27.22 million in 2024, up from $25.84 million in 2023. Above that, the IRS will again tax at a rate of up to 40%.
• The IRS calculates an estate tax rate based on the current fair market value of the assets – what they are currently worth, not their value at the time of purchase. Also, any assets that the surviving spouse inherits don’t typically incur estate tax due to something called the unlimited marital deduction.

Another area that this affects is gifts. The 2017 Tax Cuts and Jobs Act (TCJA) doubled the exemption for gifts as well as estate taxes. In addition, you can give $18,000 annually in 2024 (up from $17,000 in 2023) to an unlimited number of people. So if you give your mom $25,000 in 2024, the first $18,000 of it is tax-free. This is known as an annual exclusion gift. It’s worth noting that the 2024 $13.61 million estate tax exemption will go down for the value of every gift made.

The relative complexity of these tax exemptions makes it clear the importance of staying current on tax legislation, particularly in an election year.

The best estate tax planning strategies

Taxes are an integral part of any financial plan, be it estate, gift, income, or generational. To ease the potential burden of estate taxes, several vehicles may be useful.

A trust can help your heirs avoid the potential time and cost of probate proceedings by explicitly laying out how your wealth will be distributed to family and friends. The first step is to find a reliable trustee. Next, consider what kind of trust best fits your needs:

• Charitable Remainder Trust (CRT). When you donate to this irrevocable trust, it will pay annual income to you and/or your beneficiaries. Anything left over gets donated to charities of your choosing. A CRT can be a useful tool in shrinking your taxable estate, as well as in retirement planning and philanthropy.
• Spousal Lifetime Access Trust (SLAT). With a SLAT, you put a gift in the trust intended to benefit your spouse which removes it from both of your combined estates. Spouses retain their access to the assets and post-gift appreciation in value doesn’t get taxed. It’s worth noting, however, that the rules that allow this trust are set to sunset on December 31, 2025.
• Grantor Retained Annuity Trust (GRAT). This allows you to minimize gift or estate taxes by transferring appreciating assets to your heirs. It provides an income stream while you’re alive and then passes on the remaining assets after you’re gone.

Another option is gift planning. As mentioned earlier, you can also gift wealth up to your lifetime exclusion. it’s worth noting that some states have their own gift rules that may differ from federal tax regulation.

Portability is also a potentially useful tool that lets your surviving spouse receive your unused estate tax exclusion amount which can give your family more financial resources upon your death. There’s a five-year window after a spouse passes away to file the appropriate return and transfer the funds.

Life insurance in estate tax planning

Another tool to mitigate estate taxes is to purchase life insurance which you can use to pay off estate taxes and leave certain assets to family and friends. This is particularly useful if you have significant illiquid assets, including a business or real estate, which can appreciate over time. If your estate has a larger tax burden than it can cover with liquid assets, you can use the earnings from life insurance to help pay it down. This reduces the likelihood that your heirs will have to sell off investments, property, or businesses.

Philanthropic planning and charitable contributions

As mentioned briefly earlier, another way to reduce the size of your taxable estate is to transfer a portion of it to a charitable lead trust (CLT) or charitable remainder trust (CRT). This can come in the form of cash, investments, or tangible assets. When you donate a portion of your assets to a charity that doesn’t pay estate tax you lower the value of your estate and receive a tax break in the process.

This also reduces inheritance tax and potentially avoids capital gains tax altogether. Once you pass on, the balance of the trust gets distributed to your beneficiaries.

State and federal estate taxes

We’ve gone into some detail about the federal estate tax but it’s also crucial to be aware of the impact of state estate taxes. Currently, seventeen states – Connecticut,  New Jersey, Kentucky, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Nebraska, Oregon, Rhode Island, Vermont, Washington, Iowa, and Delaware – and the District of Columbia have an estate tax.

The value of your estate will determine if this tax applies to you – this varies from state to state. Many states have lower asset thresholds than the federal tax. 

There is some good news: if your state has an estate tax, that amount is taken out of the value of your taxable estate before you calculate your federal tax bill.

The Avior difference

Estate planning can be a challenging task. It forces you to confront big questions – what matters most to you? What impact do you want to have on future generations? But, ultimately, it will allow you to reduce your tax burden and better provide for your family, now and long after you’ve gone.

Avior’s wealth management team emphasizes grace and tact in these conversations, bringing a fresh perspective that allows you and your family to dream for the future. We look out for your current well-being and the bigger picture of your estate and legacy. Call or email us to get started.

Disclaimer: Nothing contained herein should be construed as legal or tax advice. Avior and our Advisors will work with your attorney and/or tax professional to assist with your legal and tax strategies. Please consult your attorney or tax professional with specific legal and/or tax questions. Investment Management and Financial Planner are offered through Avior Wealth Management, LLC, an SEC-registered investment advisor. Past performance is not a guarantee of future results.  Investments are subject to loss, including the loss of principal.