Estate Planning for the Affluent

Estate Planning for the Affluent

If you have amassed substantial assets during your life, you should take care when you are planning your estate so that you can preserve your wealth and pass more of it on to your intended beneficiaries while minimizing taxes. There are several effective tax minimization strategies that you can use to make certain that your family can continue to enjoy your family’s wealth for generations to come. It is also possible to structure your estate in such a way to make the transfer of assets smooth and easy while keeping information about your family’s finances out of the public’s view. By using these strategies, you may preserve your wealth and accomplish your estate planning goals.

Gifting rules

Wealthy individuals can take advantage of the gifting rules to reduce the size of their estates. The IRS reports that you can gift up to $14,000 per year. Spouses can each give $14,000, meaning that a married couple can gift up to $28,000 per year to a single beneficiary without paying gift taxes. If you have 3 children, your total annual gifts could be $84,000. The recipients will generally not have to pay taxes on the money that is gifted to them, making gifting a good way to help reduce the size of your estate.

For 2017, the lifetime gift and estate tax exemptions are $5.49 million per the IRS, which means that you can give away up to $5.49 million during your lifetime to your loved ones tax-free. It is important to understand that the $5.49 million exemption is under the federal law, and some states also have their own estate tax exemptions that are lower.

If you want to gift more than your annual maximum, you can use part or all of your lifetime exemption ($5.49 million) in addition to your annual maximum gifting allowance. These gifts do not have to be outright to your children either. They could be gifts into a trust, family limited partnership or life insurance policy owned outside of your estate to leverage the gift into a much larger benefit guaranteed.


Trusts allow you to pass assets to your intended beneficiaries outside of the probate process. This allows you to keep your family’s financial affairs private while also transferring your assets as you wish much more quickly. By contrast, the probate process is a court proceeding and is public, allowing others to learn about your finances. Probate can also take months or years to finish, meaning that your family will not have access to some of your assets for a long period of time. Since trusts do not go through the probate process, these issues can be avoided and your intended beneficiaries can receive the assets held in trust without the delays inherent in the probate process. There are many types of trusts that can also help you to minimize your taxes. A qualified personal residence trust can be established to hold your home for a set period of years, removing a

substantial asset from your estate. If you are still alive once that period of time is over, your home will transfer to the trust beneficiaries and you will need to make arrangements to pay rent if you want to continue living in it. Grantor-retained annuity trusts provide a way for you to remove assets that produce income from your estate while allowing you to continue enjoying the income from them. Charitable remainder trusts allow you to transform appreciated assets into lifetime income. When you die, the assets then go to charity. Charitable lead trusts can be used to remove assets from your estate so that you can save on estate taxes. They benefit your chosen charity for a set number of years before the assets are transferred to your family. There are other trusts that might benefit you and your estate. Your estate planning attorney may assess your estate and your goals in order to make recommendations for the types of trusts that may offer you the most benefit.

Family limited partnerships

If you own a farm or a business, a family limited partnership may be a good way to transfer the ownership of it to the legal entity while allowing you to retain some control over it. Forming a family limited partnership removes the value of your farm or business from your estate now. When you transfer assets into your FLP, you will retain an ownership interest as a general partner. You can also give ownership interests in your FLP to your children so that they are removed from your estate. Your children will not be allowed to sell or transfer their own interests so that you can remain in control of your FLP until you die while also having the ability to transfer your assets at a discounted value.

Dynasty trusts

Dynasty trusts provide a way for you to transfer your family’s wealth from generation to generation without the proceeds incurring estate or gift taxes when they are transferred to future generations. These trusts are set up to survive until 21 years after the last living beneficiary dies and can last for up to 100 years in theory. They provide a good means for wealthy families to pass their wealth through several generations without their estates being diluted by taxes. They are a very useful tool. . While estate taxes, capital gains taxes and gift taxes can greatly reduce the size of your estate when you die, careful estate planning can help you to minimize the tax burden that your family might otherwise face. An experienced estate planning attorney may make recommendations to you about the most advantageous way to structure your estate so that you can transfer more of your assets to your intended beneficiaries rather than to the IRS.

Many of the wealthiest families in the world have used a combination of a dynasty trust and life insurance to protect and leverage their accumulated wealth while protecting it from governments, potential litigators and spendthrift children of future generations. This advanced planning technique has been around for a long time and is still one of the most effective for maintaining control, leveraging assets and created enormous sums of future wealth for generations to impact the world in a positive way.

Life insurance

It is common for sizable estates to be cash-poor, containing illiquid but valuable assets (IRA’s, businesses, real estate, family farms, etc.). To provide liquidity for your loved ones, life insurance is an important estate-planning component.

A few years ago, I had a woman come into my office with a letter from the IRS. She was crying as she handed it to me. The letter said that she owed more than $700,000 in back-taxes, penalties and fees due to distribution she had been making from an inherited IRA. The only means she had to pay the taxes was with the remaining money inside the IRA which meant she would incur another $280,000 in taxes upon distribution to pay off the debt. A tax-nightmare.

Another issue called ‘Income in Respect of a Decedent’ (IRD) comes into play with inherited IRA money. If not properly planned for, IRD can obliterate your IRA.

You can use your RMD’s if your over 70.5 to pay for a permanent life policy that can be used to pay any taxes due upon death, but also to provide much needed liquidity to your heirs so they don’t end up in one of these horrendous situations.

For those younger than 70.5, a permanent life policy as part of a strategic retirement portfolio is very attractive for the living benefits that today’s policies offer. Living benefits are tax-free income, asset protection, supplemental long term care coverage, critical illness coverage and terminal illness coverage. Today’s life policies are simply not the same life insurance you’ve known your whole life. They are more advanced, less expensive and uniquely designed to provide much-needed benefits during your life as much if not more than when you die.

It is important to consider placing your life insurance policy into an irrevocable life insurance trust if it is being purchased for estate planning purposes and not for living benefits. This ensures that the death benefit won’t be included in your gross estate for tax purposes if your family has amassed more wealth than the Federal Estate Tax Exemption limits, currently $5.49 million per spouse. You may want to consider purchasing a second-to-die life insurance policy. This type of life insurance policy pays out upon the death of the second spouse so that its proceeds can be used to replenish the wealth that is used to pay estate taxes if you will owe money.

The benefits of a second-to-die policy are that both spouses can get coverage oftentimes when one spouse is uninsurable on their own. Also, the death benefit on a second-to-die policy will be higher with a lesser annual premium payment than a single-life policy.

Estate Taxes and Portability

If you pass away with an estate above the lifetime exemption amount, the current tax rate on those assets is 40%. An important concept to note here is one of portability. Under current law, each

spouse has a $5.49 million exemption. Combined, your family has potentially $10,980,000 of assets exempt from the Federal Estate Tax.

When the first spouse dies, their $5.49 million exemption does not automatically transfer over to the surviving spouse. You have to file IRS form 706 to elect portability of the deceased spouse’s unused exemption (DSUE). You have 9 months to do this from the date of death. An extension of 6 months can be requested by filing IRS form 4768.

If you forgot to file your extension then don’t fret- the IRS recently issued Revenue Procedure 2017-34. To be eligible, the decedent must have died after Dec. 31, 2010, be survived by a spouse and be a resident or citizen of the United States. The estate must be under the filing threshold and not have filed any prior estate tax return. Estates may make the portability election by filing form 706 within the necessary time frame (before the later of two years after the decedent’s date of death or January 2, 2018), and by making a special note that it’s filed pursuant to Rev. Proc. 2017-34 on the top of the return.

Many people overlook this legal requirement and fail to elect portability. If you do not elect portability of your deceased spouse’s unused exemption their $5.49 million estate tax exemption could be lost forever resulting in millions of dollars in unnecessary taxes being due.

Troy Sharpe, CFP®

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