A Quick Guide to High-Net-Worth Estate Planning

Estate planning goals for high-net-worth individuals includes protecting inheritances for heirs, minimizing estate taxes, avoiding the probate process and appointing the right trustee. The following information should be seen as a starting point for choosing the right estate planning attorney. Unfortunately, some are not acting in the best interest of their clients. They will sometimes opt for a route that provides them with the most income opportunity, not what will reduce costs and guarantee that assets end up in the right hands. (See also: Can You Trust Your Trustee?)

This is a broad category that can be broken down into income taxes, gift taxes, estate taxes and generation-skipping taxes. When you exclude income taxes from this list, the remaining group of three is referred to as wealth transfer taxes. For each type of tax within that group, federal taxes are 40% of the value of whatever is being measured. There is also what is called a unified credit, which pertains to a tax exemption of up to $5.6 million. (See also: What Are Gift Taxes?)

For example, with gift taxes, there is a tax of 40% of the gift’s value, but the first $5.6 million is not taxable thanks to the lifetime gift tax exemption. You can also offer gifts for up to $15,000 per year per individual (to as many people as you want) without being taxed. These are called annual exclusion gifts. They don’t count toward the $5.6 million lifetime gift tax exemption.

The same rules apply to estate taxes, but the $5.6 million estate tax exemption is reduced by the value of the gifts you gave throughout your lifetime. For example, if you gave $3 million worth of gifts using the lifetime gift tax exemption, then your estate tax exemption will now be $2.6 million instead of $5.6 million. (See also: 4 Ways to Minimize Estate Taxes.)

Generation-skipping transfer taxes are paid any time you give property to a child or great-grandchild. Once again, tax paid is based on 40% of the value of the gift(s), and there is a tax exemption up to $5.6 million. In case you’re wondering, this tax exists so grantors (creators of a trust) don’t bypass the next generation in order to avoid tax obligations. 

For all of the above taxes above, it’s possible that your state also imposes taxes. Check with your state to find out.

If you worked your entire life to save for retirement and to pass on an inheritance, yet that inheritance was ruined, you would be furious. Let’s avoid that situation. In the event you become incapacitated (accident, illness, aging) during your lifetime, you want to make sure you:

• Provide care for dependents
• Appoint a trustee
• Guarantee the orderly management of your property
• Specify your end-of-life treatment if in a permanent vegetative state

To accomplish these goals, you will need to make sure certain steps are taken.

Appoint a Durable Power of Attorney to:

• Manage your bank accounts
• Buy and sell property
• Manage other assets
• Open your mail

Appoint a Healthcare Power of Attorney to:

• Determine medical treatment (including doctor and hospital selection)
• Determine long-term care
• Determine specific courses of treatment

Appoint a Health Insurance Portability and Accountability Act (HIPAA) Release Agent to:

• Access your protected medical information

Complete a Living Will to:

• Indicate if you would want a feeding tube removed
• Stop treatment to allow for a natural death

Create a Revocable Trust to:

• Appoint successor trustee

Create a Guardianship Declaration to:

• Determine who will take care of any children who are minors

As hinted at in the introduction, many estate planning attorneys will lead you toward a traditional will. Why? Because they will benefit more from it than they would if you had a living trust. Be wary of estate planning attorneys who try to sell you on the idea that a living trust is more expensive and thereby not a better option than a will. A living trust is more expensive up front, but not over the long haul. If you want to avoid unnecessary financial and time costs, you need to avoid the probate process. (See also: Should You Put Your Faith in a Trust?)

In order to accomplish this goal, you simply need to opt for a living trust instead. Since it’s a trust, not everything will be in your name, which means you can bypass probate. Despite not everything being in your name, you will still have control of your assets while alive (you can appoint a successor in the event of incapacitation). 

A living trust offers other advantages as well. If it’s a revocable trust, then it can be amended, modified or revoked at any time. A revocable trust also qualifies as a grantor trust, which will allow you to move assets in and out of the trust without paying taxes. (See also: Establishing a Revocable Living Trust.)

If you’re concerned with how a potential beneficiary will behave with his or her inheritance, you can set limitations. For example, you can set a limitation that the beneficiary will only be able to use the inheritance for health or education purposes. You can also appoint an independent trustee who will have to approve all distributions.

To guarantee that your assets will end up in the right hands, be sure to create a specially designed trust where the shares of the trust will remain in the trust name and transfer to each heir when you die. This will disallow a spouse from transferring assets to his or her children from a previous marriage. It will also disallow that spouse from transferring assets to a new spouse. Additionally, this kind of trust will protect your heirs from creditors and bankruptcy. (See also: 3 Secrets You Didn't Know About Estate Planning.)

Now you know the basics about how to minimize estate taxes, plan for the event of incapacitation, avoid the probate process and protect your intended beneficiaries from immoral intentions. This information should be helpful when hiring an estate planning attorney.