According to the Pennsylvania Department of Revenue, inheritance tax could be as high as 15% depending on the beneficiary. The federal government also imposes estate tax. As of 2023, the IRS reports anyone with a net worth of $12.92 million or more will have to pay.
Proper estate planning for high-net worth individuals is essential to avoid having to pay out a lot in taxes. That is where sophisticated techniques come into play.
Family limited partnerships
A family limited partnership is an advanced strategy that allows you to consolidate and manage family assets. By forming a partnership, you can retain control while gradually transferring ownership to your heirs, often at a reduced tax cost.
A grantor retained annuity trust is a tool for transferring appreciating assets to heirs while minimizing estate tax implications. You, as the grantor, place assets in an irrevocable trust and receive annuity payments for a specified period. At the end, the remaining assets pass to your beneficiaries with minimal tax liability.
An irrevocable life insurance trust is a way to exclude life insurance proceeds from your taxable estate. By gifting life insurance policies to an irrevocable trust, your beneficiaries receive the proceeds free of estate tax.
Charitable remainder trusts offer a dual benefit: you provide for a charity of your choice while securing an income stream for yourself or your heirs. After a specified term or your passing, the remaining assets go to the chosen charity.
If you have a valuable residence, a qualified personal residence trust allows you to transfer it to an irrevocable trust while retaining the right to live in it for a specified period. This can reduce the estate tax impact while allowing you to stay in your home.
Spousal lifetime access trusts allow one spouse to create an irrevocable trust for the benefit of the other spouse while excluding assets from their taxable estate. It provides both income and asset protection benefits.
Family bank structures
A family bank is an entity established to centralize family wealth management. It can provide governance, investment and distribution mechanisms to ensure effective wealth management for the benefit of the entire family.
High-net-worth individuals can take advantage of annual gift tax exclusions, which enable tax-free gifting up to a certain limit each year. Additionally, lifetime gifting can reduce estate tax liability by gradually transferring assets to heirs.
Estate planning is not solely about passing on wealth—it is about preserving it, minimizing taxes and ensuring that your legacy thrives for generations. For high-net-worth individuals, traditional estate planning often falls short, so they have to look beyond these typical steps to more advanced techniques.