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High Net Worth Inheritance Planning: What You Need To Know

Posted by Jim Kantowski, CFP®, CPA on May 21, 2021

High Net Worth Inheritance Planning: What You Need To Know

Inheritance planning for your family’s future is an important part of an estate plan that can become complicated for high net worth individuals. Many Americans can pass down assets to their heirs without estate tax issues. However, this is not the case for individuals with a high net worth due to federal estate tax law, which has made headlines recently in light of proposed changes to estate tax exemption levels.

Creating an inheritance plan can help you pass down wealth or assets to future generations with the least possible tax in the event of your death. It can also eliminate ambiguity around your wishes that could lead to strained relationships within your family. In this blog post, we’ll explore five inheritance planning tips for high net worth individuals.

Are you seeking inheritance guidance from a team of experts as part of your estate plan? Schedule a call with Bay Point Wealth to learn how we work as a team with estate planning attorneys to secure your family’s future.

5 Inheritance Planning Tips For High Net Worth Individuals

1. Understand that inheritance planning involves more than your will.

A will is one of the foundational documents of your estate plan, along with other key documents like a power of attorney and an advanced medical directive, which in the event of your incapacity provides for the management of your financial affairs and medical decisions, respectively.

However, a robust inheritance plan goes beyond the basics. As a high net worth individual, you may have a substantial amount of money in accounts without beneficiaries attached to them, such as an individual retirement account (IRA). In this case, you may choose to create a revocable trust that enables you to transfer ownership of your non-retirement assets—such as your home, or a brokerage account—into the trust while still maintaining control of the funds.

One of the major differences between a will and a revocable trust is that the former goes through probate court. Depending on which document you use, either can determine how your assets will be distributed upon your death. Revocable trusts do not need to go through probate and thus are usually much more efficient and provide for more privacy than a will.

Pro Tip: In addition to a revocable trust, there are many other types of trusts you can incorporate into your inheritance plan as a high net worth individual to minimize both income and estate tax and ensure your wishes are carried out upon your death and often also provide for creditor protection. These include spousal limited access trusts, grantor retained annuity trusts, irrevocable life insurance trusts, charitable trusts, and generation-skipping trusts, to name a few. The best choice for you depends on your unique goals and financial situation, so be sure to discuss the options with your financial advisor.


2. Create your inheritance plan early.

The future is uncertain, and it’s essential to be prepared for anything. This includes beginning the inheritance planning process early to remove future growth on assets, such as investments and property from your estate. This kind of proactive tax planning will help you minimize paying hefty estate taxes on your assets down the road.

Once you’ve established that you have enough wealth to support your own standard of living and may not need to rely on some of your assets, you may want to begin moving some of your money and assets from your estate into a trust that captures future growth of your assets outside of your estate. The benefit to this is that you can minimize the amount of assets that may be taxed in your estate, and they will continue to grow to support future generations or your charitable wishes.

3. Hire a team of experts to provide inheritance guidance.

As a high net worth individual with a certain level of assets, you need the help of professionals with specific knowledge to create a personalized inheritance plan for your family. This team includes your financial advisor, your estate planning attorney, and a Certified Public Accountant (CPA). It’s important to find experts who regularly deal with your level of wealth and are well versed in strategies to minimize taxes.

For example, if you own 100% of a company that is growing and increasing in value, have children working alongside you, and you are looking for an exit strategy, this will get complicated. You will need your financial planner and advisor to help understand if you will have enough wealth for your own future. You will also need an estate planning attorney to help strategically set up the transfer, and a CPA to make sure you manage the tax side of the transaction properly. A team of pros who understand your objectives and have specific expertise in each area can help you reach your objectives in the best way.

4. Review your investments as part of inheritance planning.

While it’s key to remove growth from your estate, you still need to be careful because some investments are better suited to trusts than others. You may want to include real estate or interest in a family business that you want to preserve for future generations.

In addition, the location of your investments plays a role in your overall investing strategy. For example, you may want to be more aggressive with assets that you’ve moved from your estate into a trust. If your children are planning to inherit these assets, they’ll likely have a longer time horizon before they need to access the investments. In contrast, you may need access to certain investments sooner to fund your retirement, so a less aggressive investment in these stocks makes sense.

Charitable planning also comes into play. As a high net worth individual, if you purchased a stock in your portfolio for $10,000 that turned into $1 million, you would incur a high capital gains tax if you sold this investment. If you have charitable intentions, it may be a smart move to donate this highly appreciated stock to charity instead of selling it to avoid paying tax.

5. Include different types of life insurance in your inheritance plan.

Life insurance is a valuable tool for high net worth individuals. For example you may decide to create an irrevocable life insurance trust (ILIT) with a $5 million policy. Upon your death, the $5 million policy will be excluded from your estate because it is owned by the ILIT, so it won’t affect your estate tax.

Typically, the purpose of an ILIT is not to replace income for your spouse or children in the event of your death. Rather, this type of trust often serves to pay for your assets. For example, if your assets are valued at $20 million but your heirs do not have the cash to cover the tax costs, they can use ILIT funds to provide liquidity for illiquid assets like businesses or land.

Get Inheritance Guidance Tailored To Your Family’s Needs

It’s essential to know where your wealth will go when you pass away. The key is to be specific about your wishes to ensure your money and assets are distributed as smoothly as possible. The inheritance planning process can be long and complex, so working with experts who can provide the right advice for your situation is a must.

At Bay Point Wealth, we have extensive experience working with high net worth clients. We also pride ourselves on our ability to listen first and act second—and we’re never too busy to take your calls or answer your questions. Our team has access to estate planning attorneys who can work with you to set up trusts and determine the flow of your assets as part of an inheritance plan. Schedule a call with us today to learn more about how we can help.

Aging Gracefully

Topics: Financial Planning