Wealth Management and Tax Planning for Families

For high-net-worth families, many legal strategies are employed to preserve wealth and minimize taxes. However, tax laws continually change and can impact new and existing estate plans.

For example, the SECURE and SECURE 2.0 Act presents some challenges and opportunities in high-net-worth estate planning and the ability to transfer wealth from one generation to the next. Other changes include portability election, changes to lifetime gift tax, generation-skipping transfer (GST) tax, and more.

Many of these changes increase the tax-free transferable amounts for three more years, which, without further legislation, will decrease dramatically on January 1, 2026. Now is the moment to take advantage of and plan for what lies ahead to protect your family’s wealth for generations.

Federal Estate Tax Exemption

The federal estate and gift tax exemption is currently $12.92 million per individual ($25,84 per couple), up from $12.06 million in 2022. Unless Congress changes the law, these estate tax limits will sunset on December 31, 2025, when the exemption amount will revert to the prior law’s $5 million cap. The $5 million cap will be adjusted for inflation, and the exemption projection is about $6.2 million, or almost half of the current exemption amount.

Gift Tax Exclusion

The gift tax exclusion is currently $17,000 per individual or $34,000 per couple, and these gifts won’t count against your lifetime exemption. If you have a high-net-worth estate, aggressively gifting cash to family members can reduce your overall estate value when the federal estate tax exemption is reduced to pre-2018 levels in 2026.

Generation-Skipping Transfer (GST) Tax

This tax is imposed on wealth transfers when it exceeds the exemption limit for grandchildren (or more remote descendants) over 37.5 years younger than the donor. The GST prevents non-taxable transfers of wealth that skip a generation and are over the exemption limit to a flat rate of 40 percent.

IRAs

The SECURE Act 2.0 makes substantial changes to inheritable IRA rules. These changes include:

·       Qualified Charitable Distributions

·       Delayed RMDs

·       Repealed ROTH Account Pre-Death RMDs

·       Conversions from 529 Plan to Roth IRAs

·       Changes to the 10-year withdrawal rule for IRAs

Corporate Transparency Regulations

Effective January 1, 2024, the Corporate Transparency Act requires business entities to disclose beneficial owners to FinCEN – the Financial Crimes Enforcement Network by January 1, 2025. These entities include LLCs, Corporations, and Limited Partnerships, which many high-net-worth families use to reduce taxes. Beneficial owners are those individuals who directly or indirectly:

·       Owns or controls a minimum of 25 percent of the company

·       Exercises substantial control over the company

·       Trustees of a trust or trust beneficiaries as the sole recipient of principal and income, or a trust settlor with the power to withdraw or revoke all assets

How Trusts Help

Legislation is always evolving and requires attention to identify opportunities and challenges, particularly regarding tax planning. Using different trust types is one of the most effective ways to protect your family’s high net-worth estate. These legal entities can hold assets for the benefit of designated beneficiaries while providing tax advantages and other protections.

Trusts are either revocable or irrevocable. Revocable trusts are typically used to avoid the probate process and allow the grantor to make changes to the trust during their lifetime. An irrevocable trust can’t be changed without special decanting rules or court permission. They are often used for asset protection and tax planning.

Intentionally Defective Grantor Trust (IDGT)

This trust allows a person to isolate certain assets for favorable income tax or estate tax treatment. It ensures the individual continues paying income taxes, shifting the future value of that asset from your gross estate to avoid death taxes on the appreciation.

Charitable Lead Trust

This trust provides income to a qualified charity for a certain time, after which the remaining assets go to beneficiaries. It provides dual benefits for a person who wants the legacy of a charitable donation while still providing for their loved ones.

Charitable Remainder Trust

The reverse of a charitable lead trust, this trust first provides income to beneficiaries for a certain time, after which the remaining assets pass to a qualified designated charity. This trust is useful for younger beneficiaries needing a head start in wealth accumulation without overlooking the grantor’s desire to benefit charity.

Crummey Trust

This trust allows the grantor to qualify for the annual gift tax exemption while transferring assets to beneficiaries in the future. It has a thirty-day limited period for beneficiaries to withdraw the gift, after which it becomes part of the trust.

Typically, this trust type is used to purchase a life insurance policy where the insured wants to remove the proceeds at death from their gross estate. The death benefits are managed to protect the insured from creditors of the beneficiaries.

Generation-Skipping Trust

This trust allows the grantor to transfer assets to two or more generations-younger beneficiaries. This skip benefits those who want to provide for grand and great-grandchildren while deferring the tax obligations of the estate tax for multiple generations.

Grantor Retained Annuity Trust (GRAT)

A GRAT allows the grantor to transfer assets to beneficiaries while retaining the right to receive trust income for a certain time. It provides some level of control over the assets while still transferring assets to heirs.

If the grantor dies while receiving the trust’s income, the full value of the assets will be part of their estate. If the grantor lives beyond the time they receive trust income, the full value of the trust property is not part of the estate and avoids estate tax.

Asset Protection Trust (APT)

High-net-worth families use an APT trust to protect assets from future unknown or unforeseeable creditors, predators, or lawsuits. It’s created by the grantor who benefits from the trust during their lifetime.

Is Your Estate Plan Safe?

An estate planning attorney specializing in high-net-worth estates can best assess how your plan will fare under current and future legislative changes to estate tax laws and regulations. They can review your family’s financial situation, assets, and potential tax implications to make changes to accommodate your needs.

An estate planning attorney can collaborate with other professionals like tax advisors, financial planners, and accountants to craft an estate plan that ensures all aspects of your family’s financial situation are considered to preserve your family’s wealth.

We hope you found this article helpful. Please contact our Denver office today at (303) 337-2400 and schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.