Essential Tax Considerations When Creating a Will for High Net Worth Individuals

Wealth preservation is perhaps the most important consideration in estate planning for high net worth individuals. Taxes can take a big chunk out of a carefully cultivated estate unless care is taken in developing a strategy that will minimize the impact of federal and state taxes.

This initial post is an overview of some of those tax considerations, and we'll follow up in future posts in greater detail on each of the issues included below.

Federal Estate Tax Exemption

The cornerstone of estate tax planning is understanding the federal estate tax exemption. As of 2024, the exemption is $13.61 million per individual (and double that for a married couple), meaning estates valued below this threshold won't incur federal estate tax. That historically high exemption is due to end at the end of 2025, perhaps to a rate as low as $7 million (it's all relative of course!), so it is wise to start planning now if your estate is likely to fall off that tax cliff at the end of 2025. If you need motivation to start the planning process, keep in mind that the federal estate tax rate can be as high as 40% on the excess value.

Lifetime Gifting Strategies

Incorporating lifetime gifting into your estate plan can significantly reduce eventual estate tax liability. The annual gift tax exclusion allows you to give up to $18,000 (as of 2024) per recipient without incurring gift tax or using any of your lifetime exemption. For married couples, this amount doubles to $36,000 per recipient. Systematic gifting over years can substantially reduce your taxable estate.

State Estate Taxes

While federal estate tax attracts most of the attention, state-level estate taxes shouldn't be overlooked. Some states have much lower exemption thresholds than the federal government, and a few impose inheritance taxes on beneficiaries. Understanding and planning for state-specific tax implications is essential, particularly if you own property in multiple states.

Trusts as Tax-Efficient Vehicles

Various trust structures can be powerful tools for minimizing estate taxes. Some of these strategies have the benefit of removing assets from your estate for tax purposes while enabling you to continue enjoying their benefits during your lifetime:

- Irrevocable Life Insurance Trust (ILIT): Life insurance proceeds are typically included in your taxable estate, but an ILIT can remove them from estate tax consideration.

- Grantor Retained Annuity Trust (GRAT): This allows you to transfer appreciating assets to beneficiaries while retaining an income stream for a specified period.

- Qualified Personal Residence Trust (QPRT): This can remove your primary residence or vacation home from your taxable estate while allowing you to continue living there.

Charitable Giving Strategies

Philanthropic planning can provide significant tax benefits. Consider:

- Charitable Lead Trusts: Provide income to charities for a set period, with remaining assets passing to heirs with potential tax benefits

- Charitable Remainder Trusts: Generate income for you or your heirs, with the remainder going to charity

- Direct charitable bequests: Reduce your taxable estate while supporting causes you care about

Business Succession Planning

For business owners, succession planning intersects with estate planning. Consider:

- Family Limited Partnerships (FLPs) to facilitate tax-efficient transfer of business interests

- Valuation discounts for minority interests or lack of marketability

- Installment sales to intentionally defective grantor trusts (IDGTs)

Regular Review and Updates

Tax laws change frequently, and exemption amounts are subject to modification. As mentioned above, the Federal estate tax exemption is due to be reduced significantly at the end of 2025. Regular reviews of your estate plan ensure it remains optimized for the current tax environment. Beginning the process of estate planning now, or reviewing and updating your plans in place, will ensure that your family derives the maximum benefits of your estate while reducing significant headaches down the road.