A common process that any person will need to prepare for is estate planning. Covering the transfer of assets after your passing, this final action involves both professional advisors who are familiar with your family and/or business structure to best hand off your property and monetary values to appointed beneficiaries according to your wishes.

Those with high net worths, especially ultra-high net worth, should be especially engaged into estate planning, as having assets that are larger in both quantity and quality than most others requires extensive protection from pitfalls and complications due to your unique position. 

Why Is Estate Planning Important For High Net Worth Families And Individuals?

Estate planning is essential for high net worth families and individuals because of the risk that an estate will be liable for estate tax on the death of the decedent and because without an estate plan, family members may fight about the distribution of wealth to the next generation.

What Net Worth Is Considered High Net Worth?

Great question. It depends on who you ask: high net worth is considered to be someone with at least $1M in liquid assets, and an Ultra high net worth individual has a net worth of at least $30M, including their home. For most institutions today, a client is high net worth if they have a net worth of $5M or more and ultra-high net worth if they have a net worth of $50M or more.

Is Estate Planning For The Rich?

Estate tax planning may be for the rich, but estate planning is for everyone. If you are concerned about how your assets or wealth will be distributed when you die, you need an estate plan. 

At What Point Are You Or Your Family Considered High Net Worth?

When your net worth reaches $30M to $50M, translating to, in the real world, having enough capital to sustain your family without the need to work.

10 Estate Planning Strategies For Ultra High Net Worth Families

Preparing for the future is unique for each individual and their families, as mentioned earlier. Considering your overall assets, estate, financial protections, and any income taxes that your beneficiaries will be handling on your behalf, I would recommend these strategies that are flexible to best provide to your wishes:

Save Through Gifting

The net estate of a decedent is liable for estate tax at the Marginal rates of 18% to 40% after the current estate tax and gift tax exemption of $11.7M (I.e., the unified tax credit) if a donor has not previously utilized the uniform credit to exempt gifts made during their lifetime from gift tax. For this reason, gifting is considered an effective planning tool for Ultra High Net Worth Families looking to reduce their exposure to estate tax or gift tax; this is a pre-eminent estate planning strategy. It is also a mechanism to defer capital gains tax, and for this reason, we like to point out that the benefit of gifting is just as valuable in capital gains tax as in estate tax and gift tax.

Gifting can happen by a direct gift of an asset from a donor to a beneficiary, or in some form of trust such as a Grantor Retained Annuity Trust, an Intentionally Defective Irrevocable Trust, or some other form of an irrevocable trust.

This use of the unified tax credit is something that you should discuss with your CPA on an annual basis. CPAs that do not track this do not understand the difficulties that may exist if you do not plan sufficiently. There is a chance that it negatively impacts your estate plan in the long term.

Split Family Income

The movement of assets from an individual’s name to some form of structure will allow the family the flexibility to split income across a broader range of beneficiaries and assets while simultaneously protecting them from risk and maintaining control. An estate plan can split the rights of beneficiaries into multiple classes and categories and ensure that beneficiaries have the appropriate rights that fit a donor’s objectives.

Charitable Giving

Charitable giving is another way of removing assets from the estate of an Ultra High Net Worth Family who wishes to move wealth outside the estate of a decedent and reduce the risk of applying estate tax.

Life Insurance

The maintenance of life insurance can be a critical estate planning strategy. Life insurance can be term or permanent, ‘whole of life’ insurance. By maintaining an insurance policy, a family can use it to protect against estate tax risk. Death benefits paid from life insurance are tax-free, so they can be a valuable tool to fund estate tax. However, to ensure that the death benefit is not part of the decedent’s estate, it is critical to ensure that the beneficial owner is not the decedent.

Establish A Family Limited Partnership

A family can substantially reduce the value of assets that are being transferred to children by establishing a Family Limited Partnership and contributing assets to that partnership. Partnership interests with certain restrictions that result in them not being easily marketable can reduce the valuation of such interest under US estate tax laws. This is why Family Limited Partnerships are one of the most pre-eminent structures for Ultra High Net Worth Families that are conducting US estate planning.

Plan For Business Succession

Business succession planning happens to be one of the most crucial estate planning strategies of any advanced estate plan. It involves an owner determining who would own, control, and manage a business in the event of the death or disability of the patriarch or matriarch. 

In many cases, business succession planning is committed to writing. Then the business owner codifies the plan through an appropriately drafted partnership agreement (for an LLC) or constitution or shareholders agreement (for a Corporation).

Pass On Vacation Property

Some families have a sentimental attachment to places where they spend their summers as children. Usually, this signifies that they have obtained the real estate in a more peaceful location within the US or abroad. For this reason, when the families think about legacy and longevity, they think about the way they could perverse the use of a vacation home for future generations.

The transfer and maintenance of properties for multiple generations are not without challenges. Not all family members will think about the property the same way, nor will their spouses. A lot of challenges can tend to result from families not leaving sufficient capital to fund the maintenance of the property.

For this reason, families need to consider the optimal structure for the ownership of a vacation home. Is it in a trust or some form of family partnership? As has been outlined for the Family Limited Partnerships, there may be some estate tax benefits if the ownership of the property is structured in such a way that the interests have limited marketability.

Consolidate Assets

Any estate plan should be structured and focus on consolidating assets. Removing complexity is key to ensuring that the family can run the family assets like a business, which can be, for many Ultra High Net Worth families, the birthplace of their family’s family office. 

Incapacitation Planning

Any estate plan should consider how affairs will be managed if the decedent dies or if they because incapacitated. In the US, these issues may grant the executor of your estate power of attorney and/or a living will.

Instill Financial Responsibility

For Ultra High Net Worth Families, the single most significant risk that the family will go shirtsleeves to shirtsleeves within three generations is the failure of the patriarch or matriarch to educate their family on what it means to be financially responsible. 

The idea of the family office really shines in this scenario. It is a framework by which a family establishes minimum criteria for a family to share in the fruits of a family’s labor. 

It is evident when a family has not invested in their children’s education. There is an unhealthy amount of competition between the parents and their children. If the parents are the first generation, there is a sense that they had to struggle, so their children need to figure it out. If the parents are the second generation, in many cases, it is a failure of the parents to understand their role as custodians of family wealth.

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Learning The Tax Laws In Your State

The Estate Tax laws of each state are not identical to the federal laws. Any person that is drafting an estate plan needs to understand the estate tax laws in the state where they live and the state in which they expect to die.

Estate Planning Pitfalls To Avoid

The biggest pitfall to avoid is not having a will or not having a valid will. Ultra High Net Worth individuals need to understand where they are domiciled and the laws by which their assets will be governed if they die. Different countries have different requirements for the witnessing and authentication of wills, how they are witnessed, how they are signed, the process for probating the will, and how assets pass under a will, and how individuals under the will must transfer tax remaining from you. In some countries, getting married will invalidate a will predating that marriage. 

The second biggest pitfall for non-US citizen Ultra High Net Worth individuals does not understand whether or not you are domiciled in the US. Your status as a US domiciliary or non-domiciliary can significantly impact your ability to make nontaxable gifts during your lifetime or transfer nontaxable assets on your death. 

These issues should be discussed in detail with an estate planning attorney specializing in drafting comprehensive estate plans.

Retirement Planning For High-Income Earners

Retirement Planning is important for any individual regardless of whether they are Ultra High Net Worth. It is less about the investments chosen to grow or preserve capital but more about understanding the extent of an individual’s needs and whether the capital allocated for use upon retirement is sufficient to meet an individual’s after-tax (I.e., earnings net of income tax) objectives.

Should I Hire A Wealth Management Firm?

Wealth Management Firms are a crucial component of determining an individual’s estate plan, but they are one of a number of advisors critical to a successful result. 

The most important thing is the effectiveness of a strategic holistic financial and estate plan, and investment selection will be a natural progression of the success of that process. 

High Net Worth Estate Planning is Complex

High Net Worth Estate Planning for international clients connected with the US is extremely complex. You need to consider tax, trust, and probate laws in multiple countries. 

We strongly recommend that clients think through the strategic objectives of their estate plan in the first instance and then engage a team of experts on these issues and their application to their individual circumstances.

Additional Issues For High Net Worth Estate Planning

Though estate planning can be beneficial, additional issues or questions can arise while deciding if this is for you.

High Net Worth Estate Planning Is Complex

From choosing the right advisors to learning which financial laws/taxes are applied to your unique assets, all and more can be difficult to navigate for yourself and your loved ones when deciding how to plan for the future, especially with any loopholes, pitfalls, or surprises that might occur along the way. However, complex doesn’t have to mean difficult when paired with accurate information and expert advice on what is best for your legacy.

Why Plan When It Will Only Benefit After You Die?

While estate planning does affect after your passing, preparing all your assets before this will help finalize all legal and tax planning procedures with your active participation, giving you and others peace of mind before your time comes.

Asena Advisors focuses on strategic advice that sets us apart from most wealth management businesses. We protect wealth.
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FAQ

  1. How much money do you need for ultra-high net worth? 
  2. Is estate planning for the rich? 
    • No. Individuals from any economic background can start estate planning if they wish to pass on their assets to family, friends, companies, etc.
  3. What net worth is considered high net worth? 

 

If you have any questions about estate planning or ultra-high net worths, please reach out to Asena for more in-depth advice. 

Peter Harper