High Net Worth Estate Planning
Are you a high-net worth individual? The answer can depend on whom you ask. Respondents to a recent survey thought $400,000 of liquid assets (the median average) qualified a person as having high-net-worth. The commonly accepted high-net worth threshold according Forbes and others in the financial services industry, however, is $1 million of liquid assets for individuals or households.
Is estate planning really necessary?
High-net-worth individuals frequently tell us that they don’t need estate plans because their estates aren’t valuable enough to incur any taxes. They know that in 2022, the first $12.06 million for individuals and $24.12 million for couples is exempt from federal estate tax, and they’re right. We’ll concede that minimizing taxes is an important reason to put an estate plan in place, but it’s just one of several. Before we look at those, there’s an important tax-related caveat for our clients in the DMV:
The District of Columbia and 17 states assess estate and / or inheritance taxes at much lower tax thresholds. For example, estates as small as $4M are taxed between 12% and 16% in D.C., and in Maryland estates of $5 million are taxed at rates between .8% and 16% plus a 10% flat rate inheritance tax.1
Estate planning Advantages
It’s easy to focus on tax savings, but estate plans have other important advantages including:
- Avoiding probate
- Choosing guardians for any minor children
- Protection from creditors
Probate is a court-administered process of distributing assets to your heirs. If you have a will, the court simply authenticates it and approves your executor / personal representative. If you do not have a will, the court names a personal representative and decides how to distribute everything you own. Your estate will pay court and legal fees and the process can take months or even years to complete.
As part of the probate process, your estate becomes public record. Few of us want to expose our assets to public scrutiny, and no one wants creditors or “heirs” we’ve never heard of, much less met, to challenge our true heirs. As you can imagine, battling these challenges is both stressful and expensive.
Guardians for minors
If you die or become incapable of raising your minor children, you will want their guardians to be responsible adults that you choose—not a court. Your will names that person and can designate a backup guardian. If the guardian(s) you name live in another state, an “emergency guardian” whom you designate can care for your children until the permanent guardian can take over.
Along with a last will and testament, most individuals create some type of trust to control the distribution of funds to heirs. A trust can also protect funds from divorce, bankruptcies, lawsuits, and other creditors. There are many types of trusts, so it is important to consult competent legal and financial counsel to completely understand your options.
Estate Planning for High-Net-Worth Individuals
Minimizing taxes, avoiding probate, maintaining privacy, choosing guardians, and protecting assets from creditors are just a few of the reasons we encourage our clients2 to create sensible and structured estate plans. These plans can include financial, medical, and healthcare powers of attorney, gifting to individuals and charities, and the use of life insurance to cover expenses and provide liquidity.
When tailored to your needs as a high-net-worth individual, a comprehensive estate plan communicates and carries out your wishes related to your care, your financial assets, and the care of your children in a manner that protects your privacy and minimizes taxes. It preserves the wealth you’ve worked hard to accumulate and puts in place mechanisms to transfer that wealth to the people and organizations of your choice.
From personal and professional experience, we know that estate planning can be a difficult topic to think about and discuss. There are multiple financial and legal strategies to consider, yet complexity doesn’t change the fact that estate planning is a must.3 We can assure you that knowing you’ve done everything you can to protect your family and your wealth brings peace of mind that is truly priceless.