High Net Worth Estate Planning

For some high net-worth individuals, an estate could be subjected to federal estate taxes prior to beneficiaries receiving their inheritance. Although the current estate tax exemption is $5.49 million ($10.98 million for couples), those who have accumulated significant assets may face an estate tax up to 40 percent. There are strategies that can help help to protect your loved ones from these tax burdens when you pass away, however.

GM Law is the premier estate planning law firm serving high net-worth individuals and families in Santa Barbara County and throughout the state of California. We are uniquely qualified to provide our clients with a wide range of estate planning strategies and charitable gifting techniques that are designed to reduce federal estate taxes and preserve their wealth.

High Net-Worth Estate Planning Techniques

Because you’ve worked hard to accumulate wealth and provide for your family, our estate planning attorney will advise you on how to capitalize on the following sophisticated and highly effective tax minimization strategies.

Tax-Free Annual Gifting

Currently, federal law permits individuals to make gifts up to $14,000 ($28,000 for married couples) without tax consequences, and there is no limit to the number of people who can be gifted. In short, those with significant assets can give loved ones a portion of their inheritance each year, as well as make gifts to others, while reducing the taxable value of the estate. In addition to the benefit of minimizing estate taxes, many individuals take delight in being able to see their loved ones enjoy some of their inheritance.

Charitable Trusts

For those who wish to leave a legacy of charity, certain trusts can be put in place that reduce income and estate taxes by combining gifting with charitable donations. One type of trust is a charitable remainder trust into which property is transferred with a charity named as the final beneficiary. Another individual receives income for a certain period of time, and then the remainder is provided to the charity.

Family Limited Partnerships 

A Family Limited Partnership or FLP is a type of limited partnership that is formed among members of a family. Generally, a limited partnership is comprised of general partners, who control management and are personally liable for partnership obligations, and limited partners, who are passive investors and have no liability beyond their capital contributions.

In an FLP, the partnership is typically formed by the older generation family members who contribute assets to the partnership in exchange for a small general partnership interest and a large limited partnership interest. The limited partnership interests are transferred to children and/or grandchildren, but the general controlling partnership interests are retained.

FLPs provide a number of advantages including minimizing estate and gift taxes and asset protection. By transferring limited partnership interests to family members, the taxable estate of the older family members is reduced while they retain control over the decisions and investment distributions. Additionally, because limited partners have no controlling interest, they are eligible discounted valuations at the time of transfer, which will reduce the value of their holdings for gift and estate tax purposes. It is important to note, however, that an FLP must be properly structured according to Internal Revenue Service rules, otherwise the partners could face significant tax penalties.

Qualified Personal Residence Trusts

For many individuals, a home is typically one of the largest assets in their taxable estate. A Qualified Personal Residence Trust or QPRT is one that allows a house or vacation home to be given away, while freezing its value for estate tax purposes and allowing the owner to continue living in it. In this arrangement, title to the house is transferred into the trust for the benefit of family members. The owner reserves the right to live there for a specified period after which the house, and any appreciation in its value since the transfer, passes to the beneficiaries free of additional estate or gift taxes.

Additionally, the owner may continue living in the home at the end of the designated period, provided that he or she pays rent to the family, or a designated beneficiary. In so doing, the residence will not be included in the estate. Although this will reduce the value of the owner’s taxable estate, the rental income will have tax consequences for the beneficiaries. If the owner dies prior to the end of the designated period, however, the full value of the house will be included the taxable estate. Finally, a QPRT can provide asset and creditor protection since the home is technically owned by the trust once it is transferred.

Irrevocable Life Insurance Trusts 

While life insurance proceeds pass outside of an estate and are not subject to probate, they are included in the total value of the estate, which means that beneficiaries could lose a significant portion of these proceeds to taxes. By creating an Irrevocable Life Insurance Trust (ILIT), the policy can held outside of the estate and the proceeds are not included in the taxable estate. The trust is both the policy owner and the beneficiary. In the event that the estate is subjected to estate taxes, the proceeds from the policy could be used to pay those taxes. Proceeds can also be used to pay off estate debts, final expenses and provide income to a surviving spouse or children.

Santa Barbara High Net-Worth Estate Planning Attorney

At GM Law we routinely provide our high net-worth clients and their families with a powerful combination of sophisticated legal advice and financial acumen. By collaborating with a respected network of financial advisors and CPAs, we can devise a strategy that allows you to transfer assets to loved ones, leave charitable gifts, minimize tax consequences, and preserve your legacy for coming generations. Call our office today to set up a consultation or complete the contact form on our website.