Estate taxes are a fact of life. Regardless of your asset amount, you will want to plan ahead. But if you have a high net worth, you will want to take extra steps to ensure that your beneficiaries will receive all that you intend.
Let’s look at who is affected by estate tax and some specific strategies for those who have a net worth that exceeds the estate tax exemption amount.
Who Is Affected by Estate Tax?
What do you think of when you hear the word estate? Visions of a large mansion-like home and multiple sports cars parked in the circular driveway? Maybe, but that’s mostly in the movies.
Everyone has an estate, regardless of whether they have a Lambo or not. Your estate is the total amount of all that you own, both tangible and intangible. It includes things like artwork, cash, financial investments, insurance policies, jewelry, real estate, royalties, undeveloped land, and any other possessions that contribute to your overall net worth.
Once you die, the U.S. government assesses your estate and levies an estate tax. Some states also impose their own estate tax or inheritance tax (or both!) in addition to the federal one. Understanding estate tax and how it affects you is important to help you plan how you can protect your assets.
Estate tax exemptions change from year to year and are scheduled for another major change in 2026. The quick and dirty details include:
● The estate tax is calculated by the federal and state governments based on the fair market value of the assets, not what was paid for them.
● Surviving spouses do not have to pay estate taxes on what was bequeathed to them by their deceased spouse.
● The estate tax threshold for 2023 is $12.92 million. This means if your combined assets are under this figure, you are not subject to estate tax.
● Starting in January 2026, the threshold is scheduled to drop to $5 million plus inflation. The phasing out, or sunsetting, of the 2017 Tax Cuts and Job Act (TCJA) will occur on December 31, 2025. TCJA had increased the exemption and allowed for a yearly increase to keep up with inflation, but that is set to end.
While there are still a couple of years before the exemption level drops, now is a good time to figure out estate planning strategies, especially if you have a higher net worth.
Four Estate Planning Strategies for High-Net-Worth Individuals
What is considered high net worth? Once again, visions of movie star wealth are easy to conjure up. But in reality, high net worth is considered anyone with over $1 million in liquid assets.
Liquid assets include things that can easily become cash. Some examples are bonds, cash on hand, certificates of deposit (CDs), exchange-traded funds (ETFs), government bonds, money in checking and savings accounts, money market accounts, and stocks.
Estate planning for high-net-worth individuals is very individual to that person’s assets and family dynamics. Transferring wealth to the next generation rather than amassing wealth is the goal. It can be complicated so working with a qualified financial advisor is key.
Four general estate planning strategies to consider include the following:
● Put an estate plan in place. This seems like a no-brainer, but many people don’t think about assembling an estate plan until something goes wrong. Estate plans not only protect your heirs and the inheritance you are leaving them by reducing taxes owed and avoiding probate, but they also include provisions for a power of attorney should you become debilitated.
● Determine what assets are best for gifting. One way to avoid estate taxes is to pass on some of your assets before you die. The annual gifts do not count against the estate tax exemption. Currently, gifts up to $17,000 per person per year are exempt from gift tax. It also helps to figure out what kind of asset to gift. For example, gifting property that is most likely to appreciate will remove it and its future earnings from your estate while increasing your loved one’s assets. Similarly, gifting stock shares after a recent price decline allows you to give more shares without going over the gift tax exclusion limit. When the price of the stock goes up once again, your loved ones will be happy about that.
● Give income-producing assets. If you don’t need the income to maintain your current lifestyle, consider giving an asset that generates money. This will result in a reduction to your net worth while passing along what you were going to give to your heir anyway. It also allows them to increase their wealth when they may most need it.
● Take another look at life insurance. Having a good life insurance policy in place could be one of the best things you can do. Life insurance can be used by your heirs to pay any estate or inheritance taxes owed, allowing them the full benefit of your estate. It should be held in an irrevocable life insurance trust held outside of the estate.
Remember how we said transferring wealth can get complicated? Not all of these strategies may be best for your specific circumstances. It is best to get sound advice from someone who knows your financial situation.
Estate taxes don’t have to get the best of your estate. With some careful planning and smart strategies, you can keep your inheritance from being eaten up by federal and state taxes. Take the necessary steps today to ensure your loved ones get all that you wish to leave for them.