By Chris J. Roe, CPA, PFS
As of 2024, the Federal estate tax exemption stands at a substantial $13.61 million per individual and $27.22 million for married couples. This high threshold means many families, even those with considerable assets, aren’t currently facing estate taxes. Yet, when I discuss estate planning with these multimillionaire families, a common reaction surfaces: “Why bother with estate planning if we’re not paying federal estate taxes?” This viewpoint holds weight presently, but we must look ahead. By 2026, the exemption is expected to decrease to approximately $7 million per person or $14 million per couple—still a lofty figure but one that could bring more families into the tax fold.
So, the pressing question arises: What should a family’s estate plan entail if they’re not currently subject to Federal tax?
Essential Estate Planning Documents for Every Family Member
Every adult family member should have a comprehensive suite of legal documents. This suite includes a will, financial and medical powers of attorney, directives to physicians, authorizations for medical information disclosure, guardianship designations for children and themselves, organ donation choices, and specific instructions for the disposition of remains.
Many affluent families overlook the need for regular updates to their estate planning documents, mistakenly thinking once done, it’s done for good. However, life circumstances and laws evolve. While an annual review of your estate plan is ideal, we advise updating these documents every 3 to 5 years or whenever there are significant legal changes. This ensures your plan stays relevant and effective.
The probate process, while not necessarily expensive, is often lengthy and public. Establishing a revocable trust can circumvent this. It holds assets during your lifetime, ensuring privacy and a smooth transition after death. As the trust’s creator, you maintain full control, with the flexibility to amend it as needed. This trust is a strategic tool for directing assets posthumously.
Wealthy families must also periodically reassess their choices for key roles in their estate plans. These roles include executor, agent, successor trustee, or guardian. It’s crucial to ensure that the individuals selected remain the best fit for these responsibilities.
Estate Planning Tools to Consider
- Irrevocable Trusts During Life or at Death: Beyond avoiding federal estate tax, these trusts offer protection against creditors and divorces, safeguard government benefits, and control assets, shielding them from irresponsible inheritors or external influences.
- Mitigating State Inheritance Tax: While the Federal estate tax may not apply to your wealth, different states have varying inheritance taxes. In Pennsylvania, for example, there’s a 4.5% tax on assets passed to children. Using trusts to make gifts during your lifetime can significantly reduce this tax burden. For example, if your estate leaves $10 million outright to your children, Pennsylvania will collect $450,000. This can be avoided or minimized by using gifts in trust during your life.
- Outright Gifts: Gifting assets directly to family members helps circumvent state inheritance taxes and enhances tax efficiency. When recipients are in lower-income tax brackets, their investment returns compound more effectively on an after-tax basis compared to the original asset owners. In 2024, the annual gift tax exclusion is $18,000 per person.
- Owning Life Insurance in Trust: Many families forget to account for life insurance payouts in their taxable estates. Holding these policies in an irrevocable trust removes them from the estate, ensuring they are not subject to estate tax and providing clear guidelines for asset distribution after death.
- Intra-Family Loans: These loans can assist family members with purchasing real estate, investing in businesses, or just making investments, allowing wealth accumulation by other family members and outside your estate. This can offer tax advantages both in terms of income and potential inheritance taxes.
- Gifting Assets Upstream: Gifting highly appreciated assets to a senior generation, spouse, and/or children in trust can yield a step-up in tax basis upon the passing of a senior generation beneficiary. This is achieved by inserting a special provision within the trust document. This is particularly effective for low-basis stock or long-held family businesses, potentially offering significant capital gains and tax savings.
- Installment Sales to Trusts: Selling high-value assets to a trust in installments for the benefit of your children can defer and spread out tax liabilities. The strategy is to trigger capital gains but recognize them over many years, permitting the family assets within the trust to grow tax-deferred. However, it’s crucial to consider the intricate rules and potential tax consequences involved carefully.
- Charitable Trusts: Utilizing charitable trusts, you can give highly appreciated assets while retaining a lifetime income. This allows for tax-deferred asset sales. In one trust type, you gain an immediate tax deduction, make payments to the charity over time, and eventually transfer the remaining assets to your family. Both methods effectively reduce or delay income and state inheritance taxes, significantly boosting your family’s wealth.
- Income Shifting/Wealth Transfer: By strategically shifting income and wealth to family members in lower tax brackets, such as through business income distribution or gifting business interests before selling, you can optimize tax liabilities and enhance family wealth accumulation.
Maximizing Wealth with Strategic Estate Planning
Above, we’ve outlined key strategies for estate planning in affluent families. Even if you’re not currently facing Federal estate taxes, there are still significant opportunities to reduce income taxes during your lifetime and potential inheritance taxes upon death. Minimizing the percentage your silent partner, the government, takes is a crucial step in enhancing your family’s financial legacy. If you haven’t fully explored your tax-saving and estate-planning options, please reach out to schedule a consultation.
Rx Wealth Advisors is a financial advisory firm located in the Pittsburgh, Pennsylvania metropolitan area serving high net-worth professionals. Their primary focus is to help high-earning business owners, executives, and other professionals outsource personal financial management so they can cultivate wealth while living the life they’ve earned and deserve. They can be reached at 412-227-9007, via email at email@example.com, or on the web at rxwealthadvisors.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.