Advanced Estate Planning Tactics for Wealthy Individuals and Families

Estate planning should be a high priority for every individual and family, especially if you have accumulated substantial wealth. Estate planning in St. George, Utah, can have far-reaching implications for preserving your wealth and security for your family and future generations.

Think about how hard you’ve worked to get where you are today. Without an estate plan, you risk your wealth not being transferred to those most important to you, such as family and causes organizations you want to support and future generations.

There is also the risk of your family being impacted by excessive tax consequences if no actionable estate plan is in place to address this dilution of your estate. You wouldn’t want to burden your family members with unnecessary taxes. For example, wealth is tax in the estate process through income, estate-related, gift, and generation-skipping taxes. These types of wealth transfer taxes enable the federal government to charge up to 40% and up to 20% in some states—sorry, Hawaii and Washington residents. 

As a wealth manager with offices in Chicago and St. George and clients across the country, we specialize in helping successful individuals and families create highly sophisticated estate plans that minimize avoidable taxes.

This article describes several estate planning tactics that have the potential to transfer more of your wealth to family members and organizations you want to support. 

Grantor Retained Annuity Trust (GRAT)

A Grantor Retained Annuity Trust (GRAT) is a financial instrument used in estate planning to minimize taxes on large financial gifts to your family members. It’s a type of irrevocable trust, which means once it’s established, you, as the grantor, can’t modify or terminate the trust without the beneficiaries’ consent.

Here’s how it works: You would place assets into a trust and set a predetermined period during which your designated beneficiaries will receive annuity payments from the trust. This annuity payment is calculated based on a percentage of the initial value of the assets placed in the trust. The interest rate used for this calculation is set by the IRS, known as the Section 7520 rate.

One of the primary benefits of a GRAT is its potential to reduce taxes. When assets are placed in the trust, their value for gift tax purposes is calculated using the annuity payments the grantor will receive. If these assets appreciate at a rate higher than the IRS’s assumed interest rate, the excess growth passes to the beneficiaries tax-free at the end of the term. This makes GRATs particularly appealing for assets that should be appreciated.

Another advantage is the flexibility in structuring the annuity payments. They can be set to increase over time, allowing the grantor to remove more assets from their estate as they age. This flexibility can be a strategic tool for individuals with large estates, assisting in efficient wealth transfer while minimizing estate tax liabilities.

Annual Gifts

If you are certain you have more than enough to cover all possible scenarios, there are things to consider. The current 2024 tax law permits you to gift $18,000 per person per year or $36,000 to one individual for a married couple. These gifts are not tax deductible for you or taxable income for the recipients. If you stay within the $18,000 limit, you do not need to file a gift tax return to report these gifts.

Use Your Lifetime Gift Tax Exemption

An individual has a Federal Lifetime Exemption in 2024 of $13.61 million tax-free during their lives or at death, and married couples can transfer up to $27.22 million. If you desire to make large gifts and you are motivated to donate your whole lifetime exemption amount now, ahead of any estate tax changes in 2026, without feeling the slightest bit uncomfortable or even concerned about whether they would have sufficient other assets to last them the rest of their lives. You can give away assets such as a personal home, investment property, business interests, and stocks and bonds. If you give away assets during your life, your cost basis in the asset transfers with the gift. 

If you are highly motivated to find ways to benefit from the current exemption amount as soon as possible, if not before the 2025 ends,, and you wish to donate as much as you can while exemption levels are high, as opposed to let them to decrease, we should talk. 

Currently, a married couple’s lifetime estate tax exemption is around $27.22 million as mentioned above. Should the reduced exemption change to around $7 million individual and $14 million for a couple, as it is set to now in 2026, that would represent a $13.22 million loss of estate tax protection. 

At today’s estate tax rate of 40%, that’s $5.288 million in additional estate taxes! The only way around this is to have literally given it all away while the exemption was high.

Could you do that? Many have already.

Qualified Personal Residence Trust (QPRT)

Using a QPRT, you can transfer your primary residence or vacation home into an irrevocable trust, retaining the right to live there for a specified period. This reduces the taxable value of your estate. 

When you transfer the home into the QPRT, it’s considered a gift to the beneficiaries (most often your children), but the value of this gift is reduced for tax purposes. This is because the gift is the home’s value minus your retained interest in living there for the designated term.

If you outlive the trust term, the home’s value at the time of transfer is removed from your estate for estate tax purposes, potentially leading to significant tax savings.

At the end of the term, the home passes to your beneficiaries. If you wish to continue living there, you’d need to pay fair market rent, which can be beneficial for further reducing your estate while creating income streams for heirs.

If you don’t outlive the trust term, the home’s value at your death is included in your estate for tax purposes, negating the benefit of the QPRT.

Learn more about our estate planning services for successful individuals and their families.

Charitable Remainder Trust (CRT)

A Charitable Remainder Trust (CRT) is a type of planned giving strategy that allows you to support a charity while also securing certain financial benefits for yourself and others. 

Here’s a basic outline of how it works and the potential benefits:

You establish a CRT by placing appreciated assets into it. These can be various types of assets like stocks, collectibles, or real estate. The CRT can sell the appreciated asset tax-free and generate an income stream for the lives of the designated income beneficiaries. This income can be distributed annually, semi-annually, or at other intervals and is typically a fixed percentage of the trust’s value, recalculated annually.

When you fund the CRT, you receive an immediate tax deduction for the present value of the estimated remainder that will eventually go to the charity. This can help reduce your taxable income. After the income distribution period (which could be for the life of the beneficiaries or a set number of years), the remaining assets in the trust are distributed to the named charity.

This strategy benefits those who want to support a charitable cause while receiving tax benefits and an income stream. However, it’s crucial to consider the specific terms and conditions of the trust and consult with a financial advisor to understand how it fits into your overall financial plan.

Family Limited Partnership (FLP) or Family Limited Liability Company (LLC)

A Family Limited Partnership (FLP) or Family Limited Liability Company (LLC) is used in estate planning to manage and protect family assets while potentially reducing the taxable estate. Both FLPs and LLCs offer a way to consolidate family assets while providing a structured way for family governance and facilitating the transfer of wealth to younger generations while minimizing tax liabilities. 

However, it’s crucial to strictly follow legal and tax regulations, as misuse of these entities can attract scrutiny from tax authorities. 

Family Limited Partnership (FLP):

An FLP is a type of partnership where family members hold shares. Typically, parents are general partners with control over the management of the assets, while children or other heirs are limited partners with fewer rights of control. 

Assets placed in the FLP are protected from individual creditors of the family members. And, by gifting limited partnership interests to family members, parents can reduce their taxable estates. 

The value of these interests is often lower than the underlying assets due to a lack of control and marketability, leading to lower gift taxes.

Family Limited Liability Company (LLC):

Similar to an FLP, a Family LLC involves family members as owners. You often manage the LLC while your children hold membership interests. Like an FLP, assets in an LLC are protected from creditors, and your personal assets are generally shielded from LLC-related liabilities.

You can transfer LLC interests to your children, reducing your taxable estate. These interests can be valued lower than the actual assets for tax purposes due to a lack of control and marketability.

About Cogent Strategic Wealth

Our team of experienced financial professionals takes great pride in our ability to listen and produce innovative solutions that serve the best interests of our clients. 

We are committed to crafting tailored financial strategies that resonate with your goals and values. Our focus is guiding you toward financial independence that benefits you, your family, and the causes you believe in.

Our fiduciary responsibilities that benefit our clients are characterized by the following:

  • Clarity. More than just a legal obligation, it’s vital for us that you consistently recognize the value that is provided by our advice and services.
  • No commission-driven advice. Our suggestions are based purely on what we believe is best for your circumstances. We do not sell investment products for commissions.
  • Absolute transparency for our compensation. We believe in being straightforward about expenses.

In conclusion, employing strategies like Lifetime Exemption Utilization, GRATs, QPRTs, CRTs, and Family LLCs can optimize wealth transfer and minimize taxes. At Cogent Strategic Wealth, we’re committed to customizing these plans to safeguard your legacy. Effective estate planning is an evolving process crucial for securing your family’s future. Let us guide you in establishing a lasting legacy and preparing your heirs.

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