How Does High Net Worth Estate Planning Work?

If you have a high net worth estate, your estate plan may need more than a revocable living trust. The primary objectives of a revocable living trust estate plan are to avoid probate and to provide a smooth transfer of your assets when you pass away. But if you have a high net worth estate, which we define in our practice as $5,000,000 or more, you may need to use more advanced estate planning strategies.

High Net Worth Estate Planning Strategies

Some of the estate planning strategies we use with our high net worth clients include:

• Using Marital Trust
• QTIP Trust
• Bypass Trust Provisions in the Revocable Living Trust

High net worth married couples, may want their revocable living trust to include provisions to divide the assets at the first death between a survivor’s trust, which will hold the surviving spouse’s share of the trust assets, and either a marital trust, QTIP trust or bypass trust, to hold the deceased spouse’s share of the trust assets. 

The survivor’s trust is a revocable trust, which means the surviving spouse can amend it. The marital, QTIP and bypass trusts are irrevocable trusts, which means the surviving spouse cannot amend them.

Using a marital, QTIP or bypass trust can provide a good measure of liability protection and asset protection for the deceased spouse's assets. It can also better protect the assets from a second marriage. In addition, a bypass trust can leverage the estate tax exemption amount and shield those assets from the estate tax.

Portability and IRS Form 706 Estate Tax Return.

Under current law, when the first spouse dies, the surviving spouse can file an IRS Form 706 Estate Tax Return to elect “portability” of the deceased spouse’s estate tax exemption. In 2022, the estate tax exemption is $12,060,000. Unless the law changes, the estate tax exemption is scheduled to drop to approximately $7,000,000 in 2026. Filing the estate tax return allows the family to port-over or lock-in the deceased spouse’s estate tax exemption.

Example. Husband and wife’s estate is worth $8,000,000. Husband dies in 2022. Following his death, wife can file a 706 Estate Tax Return to port-over his $12,060,000 estate tax exemption. This locks-in his estate tax exemption. By filing the estate tax return, no matter what the President or Congress does in the future to change the estate tax exemption, the family will be able to exempt at least $12,060,000 from estate tax. 

Why is this important? Because the President and Congress can change the tax law, and it has, many times. The chart below shows the changes in the estate tax exemption from 1997 to 2022.

Estate Tax Exemptions by Year

While the estate exemption amount has mostly increased, there is no guarantee it will continue on an upward trend. Just last year, President Biden and the majority in Congress said they would lower the estate tax exemption to $3,500,000. As it turned out, they didn’t have the votes to make it happen, But they wanted to, which means it could happen.

Let’s go back to the above example. If the wife dies 5 years later, and her estate is now worth $10,000,000 and the estate tax exemption has dropped to $5,000,000, her children might have to pay an estate tax on the estate value above $5,000,000. That would likely be a big estate tax. However, since she ported-over her husband’s $12,060,000, her family could exempt her $5,000,000 plus her husband’s $12,060,000 for a total of $17,060,000. Since her estate value at $10,000,000 is way less than that, there will be no estate tax. But if she hadn’t filed the estate tax return at her husband’s death, the family would have to pay a big estate tax.

If, when your spouse dies, you have a high net worth estate, we recommend the surviving spouse file an estate tax return to port-over the deceased spouse’s estate tax exemption amount.

Irrevocable Life Insurance Trust

An irrevocable life insurance trust (ILIT) is a trust that owns life insurance, but because of the way the trust is structured and the way the life insurance policy is paid, the death benefit escapes estate tax. Without an ILIT, the death benefit of a life insurance policy will be subject to estate tax. But if the life insurance policy is owned in an ILIT, the death benefit will fall outside your taxable estate. This is a relatively simple and very effective strategy for those with a high net worth to eliminate the estate tax.

Spousal Lifetime Access Trust

If you have a high net worth estate and a solid marriage, you might consider a Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust that you gift separate property assets to for the benefit of your spouse. Your spouse will be the beneficiary and trustee. Most of our California clients do not have separate property because everything is community property. But you can designate certain assets as separate property with a marital agreement.

The value of the gift will be deducted from your estate and gift tax exemption ($12,060,000 in 2022). The SLAT assets and all future growth in the assets will then be outside you and your spouse’s estate for estate tax purposes.

Example. You gift a rental property worth $1,000,000 to a SLAT using $1,000,000 of your estate and gift tax exemption for the gift. If by the time you and your spouse pass away, the property is worth $2,000,000, then you effectively removed a $2M asset out of your taxable estate by using up only $1M of your estate and gift tax exemption.

In addition to removing future growth of the gifted assets out of your estate, the SLAT also will provide significant asset protection and liability protection for the gifted assets. And due to the particular terms of the SLAT, your spouse can control the assets, which means she can use and distribute the assets for her benefit, which, if your marriage is good, will also benefit you and your family.

If you have a high net worth estate, you will  absolutely need a revocable living trust, but you may also want to include additional estate planning strategies including adding marital, QTIP and bypass trust provisions to your revocable living trust, using an ILIT or using a SLAT.

We can help you put together a comprehensive living trust estate plan to avoid private, minimize estate taxes and protect your surviving spouse’s and children’s inheritance from divorce and lawsuits.