Estate Planning 101 For High-Net-Worth Individuals

July 1, 2024 Adam Cornwell

Estate planning is more than just a financial exercise. It’s a way to protect your wealth, ensure your wishes are honored, and secure your family’s future. The stakes are even higher for high-net-worth individuals, given the complexities of managing substantial assets, navigating tax implications, and addressing family dynamics.

Whether you’re dealing with complex family structures or want to maintain control over your assets, estate planning is essential. It’s not just about who gets what when you’re gone; it’s about ensuring your wealth is managed according to your values and wishes now and in the future.

The importance of creating a robust estate plan cannot be overstated. In collaboration with Kristin Gaston of Generations Estate Law LLC, this blog aims to use hypothetical examples and explain estate planning concepts in a way that is easy for novices and experts alike.

Whether you’ve already begun the estate planning process or if this is just now coming onto your radar, this blog will have something for everyone. Let’s dive in.

Debunking Common Estate Planning Myths

Estate planning is often surrounded by myths that can lead to misconceptions. Addressing these early on can help you approach the process. Let’s look at a few common misconceptions about estate planning and explain why they don’t necessarily apply.

“Estate Planning is Only for the Elderly.”

Many believe that estate planning is only necessary later in life. However, unexpected events can occur at any age, and having a plan protects your assets and loved ones.

For example, Alex, a young professional who, after a car accident, was left incapacitated. Without an estate plan, his family struggled to manage his finances and healthcare needs. A power of attorney could have provided Alex’s family with clear guidance and prevented some of these challenges.

“A Simple Will is Enough”.

A common misconception is that a simple will suffices for estate planning. Comprehensive planning often requires more, including trusts, powers of attorney, and tax strategies. For high-net-worth individuals, a simple will may only address some aspects of their estate.

“My Family Knows My Wishes, So I Don’t Need a Formal Plan.”

While discussing your wishes with your family is essential, verbal agreements are not legally binding. Without a formal plan, disputes can arise, as family members may interpret your intentions differently.

“Estate Planning is Only About What Happens After I Die.”

Estate planning isn’t just about asset distribution after death; it also involves planning for incapacity. Robust powers of attorney and healthcare directives are critical components of a strong, comprehensive estate plan.

“All Trusts Are the Same”.

There’s a belief that all trusts serve the same purpose. However, there are various types, such as revocable vs. irrevocable trusts, each designed for different goals. In addition, trusts can be simple or complex depending on your needs. Understanding these differences is crucial for effective estate planning.

“Naming Beneficiaries on All Accounts is Enough.”

Let’s take Rachel as an example. She thought her estate plan was covered by naming beneficiaries on her accounts. However, when she passed away, her estate had significant debts and taxes but no liquid assets to cover them.

This caused delays and complications in settling her estate. These issues could have been avoided if she had balanced her beneficiary designations with overall estate planning.

Key Concepts and Considerations of Estate Planning

Now that we’ve dispelled common myths let’s discuss the essential components of an estate plan for high-net-worth individuals.

Do You Have a Will or a Trust?

Having a will or a trust is the cornerstone of any estate plan. These are necessary for your assets to be distributed how you want, rather than defaulting to state laws, which might not align with your wishes. For example, Sarah recently moved to a new state and remarried. Her old will no longer reflected her current situation, and without updating it, her new spouse and stepchildren might not be adequately provided for.

Regularly reviewing and updating your estate plan is crucial to avoid unintended consequences.

Incapacity Planning

Incapacity planning ensures that someone you trust can intervene if you cannot make decisions. For instance, Robert, a successful entrepreneur, suffered a stroke and was unable to manage his business. Because he had set up powers of attorney, a trusted friend seamlessly took over his financial and healthcare decisions, ensuring that his business continued to thrive.

A trust is also an effective way to address management of a business during incapacity.

Protection of Minor Children

For those with young children, estate planning is particularly important. Emily and David, for example, wanted to ensure their children would be cared for if something happened to them. They provided financial security by appointing a guardian and setting up a trust. They designated someone they trusted to manage their children’s inheritance until they were mature enough to handle it themselves.

Credit Shelter Planning

Credit shelter trusts can be an effective strategy to maximize the use of estate tax exemptions. These trusts ensure that each spouse’s estate tax exemption is fully utilized, potentially reducing the overall tax burden on your estate.

Family Heirlooms

Detailed provisions in your estate plan can prevent disputes over family heirlooms (artwork, vehicles, jewelry, etc.). By clearly stating who will receive certain treasured items, you can help maintain family harmony and ensure your wishes are respected.

Blended Families

Blended families face unique challenges in estate planning. For instance, Mark has children from a previous marriage and recently remarried. Without careful planning, his entire estate could go to his new spouse, leaving his children with nothing. A trust can provide for his spouse during their lifetime while also ensuring that his children eventually inherit the remaining assets.

Inheritance Protection

An Inheritance Protection Trust or Asset Protection Trust can offer beneficiaries asset protection from creditors, divorces, or other financial risks, ensuring that your wealth remains within your family.

Special Needs Trusts

A special needs trust is crucial for families with special needs. For example, Jessica has a child with special needs and is worried that an inheritance might disqualify them from receiving essential government assistance. A Special Needs Trust can allow her child to benefit from the inheritance while maintaining eligibility for government programs.

Protection of IRA Assets

Maximizing the tax-deferred growth of retirement accounts is another critical aspect of estate planning. IRAs require different planning approaches than other assets, and it’s important not to treat them as a part of the same financial “pie.”

Trustee Guidelines

Clear guidelines within your trust agreement can guide trustees, especially in complex situations where no spouse may act as a successor trustee. In these cases, independent trustees or professional services, like those offered by financial institutions, may be necessary or beneficial.

Estate Tax Planning

Estate tax planning is critical for large estates. Incorporating strategies to minimize tax liabilities can help preserve your wealth for future generations.

Transfer-on-Death (TOD) for Brokerage Accounts

Transfer-on-death (TOD) designations can help bypass probate for brokerage accounts, providing a quick and straightforward way to transfer assets to heirs. However, TODs can sometimes conflict with the provisions in a will, potentially leaving the estate without liquid assets to cover taxes and expenses.

This is why it’s essential to consider all aspects of your estate plan, not just the individual accounts. Balancing TOD designations with the overall structure of your estate ensures that your beneficiaries receive their intended inheritance without unintended complications.

The Role of Trusts in Estate Planning

Trusts play a central role in estate planning, especially for high-net-worth individuals. They offer flexibility, control, and protection for your assets. Let’s take a deeper look at a few different types of trusts and their role in an estate plan:

Revocable Living Trusts: A legal document in which you let a trustee (the initial trustee is the creator) manage designated assets for you and your beneficiaries during your lifetime. The trust is changeable (revocable) and can provide more control than a will.
Lena, a high-net-worth individual, wanted to avoid probate and maintain privacy for her family. By setting up a Revocable Living Trust, Lena was able to manage her assets during her lifetime and ensure a smooth transition to her heirs without the need for probate.

Irrevocable Trusts: An irrevocable trust aims to move assets out of the grantor’s control to that of a beneficiary. This reduces the value of the grantor’s estate regarding estate taxes and protects the assets from creditors.

James wants to protect his wealth from creditors and reduce his estate’s tax burden. He places his assets in an Irrevocable Trust to remove the assets from his taxable estate and provide his beneficiaries with protection from future claims.

Special Needs Trusts: Special Needs Trusts are vital for families with a child with special needs, as they ensure the child’s inheritance doesn’t jeopardize their eligibility for government assistance.

Understanding the difference between living and testamentary trusts is also crucial.

Living Trusts: As the name implies, a living trust is established by an individual during their lifetime to protect their assets and direct their distribution after their death.
Testamentary Trusts: These trusts are established per instructions in a last will and testament. In other words, they are created after the grantor dies.

For example, a young couple with minor children may not have substantial wealth yet. However, they can still benefit from a will that specifies guardianship and names a trustee to manage the children’s finances until they reach a certain age.

State-Specific Considerations (Oregon and Washington)

Estate planning can vary significantly based on state laws, especially estate taxes.

Oregon

Oregon has a relatively low estate tax threshold of $1 million. Effective planning strategies, such as gifting or charitable donations, can help reduce taxable estates and manage the impact of estate taxes on heirs.

For example, a high-net-worth individual in Oregon might consider setting up a charitable remainder trust, which allows them to donate to charity while still receiving income during their lifetime, thereby reducing the estate size and associated taxes.

Washington

The estate tax threshold in Washington is higher, at $2.193 million (adjusted for inflation). However, the state’s progressive estate tax rates can still result in significant taxes for larger estates. Planning strategies like credit shelter trusts or family limited partnerships can help mitigate these tax liabilities, ensuring more of your wealth passes to your heirs rather than being lost to taxes.

Understanding the nuances of state-specific estate tax laws is crucial for ensuring the effectiveness and efficiency of your estate plan.

North Ridge Wealth Advisors