An essential guide to inheritance planning for families whose net worth is more than $1,000,000 and that have a family office or trustees involved who keep the family on track with their wealth transfer strategy.
Understanding High Net Worth Individuals
High net worth individuals are defined as having investable assets of at least $1 million. These people typically have a lot of money to invest, and they tend to have more investment options than the average person.
In addition to cash and savings, high-net-worth people also have large portfolios of stocks, bonds and mutual funds. They are also likely to own real estate and collectibles such as art and jewelry.
The term “high net worth” is used by financial services companies to refer to their best customers. Some banks, for example, require that you have at least $250,000 before they’ll work with you.
Inheritance
Most people think of inheritance as a way to pass along family heirlooms and personal property to loved ones. But for the rich, it’s about managing and passing along large sums of money and other assets.
Inheritances are less predictable than other forms of income, but if you do receive one, it can have a major impact on your financial situation. In this article, we’ll look at the best ways to handle an inheritance and some common mistakes to avoid.
Transferring Large Assets to Heirs
Transferring large amounts of wealth to your children and grandchildren can have a big impact on their financial stability. However, it also has a significant effect on the estate tax and other financial factors, making smart inheritance planning a crucial part of leaving your legacy behind.
Inheritance taxes are one of the biggest costs you’ll face when transferring assets to your heirs. In most cases, inheritances don’t count as taxable income for the recipient. However, some states — including New Jersey, Maryland and Washington — do levy an inheritance tax on certain bequests.
In addition, large estates are often subject to estate tax, which is levied against the estate before inheritance is passed along to beneficiaries. These taxes can have a significant impact on how much wealth is handed down to future generations. For example, if you leave a $10 million estate and pay $800,000 in estate tax and state inheritance taxes, you’ll only be able to transfer $9.2 million in assets to your heirs or beneficiaries.
So how do you minimize these costs and transfer as much of your wealth as possible? Inheritance planning can help lower the impact of these taxes by:
Diversifying assets through investing
Implementing a lifetime gifting strategy
Establishing trusts
Estate Planning
One of the most important planning tools you can use is a will. A will allows you to make specific gifts, leave specific instructions and nominate a guardian for minor children.
If you die without a will, your property will be distributed according to state intestacy laws, which do not take into consideration the unique circumstances of your family.
Another way to ensure that your estate is distributed according to your wishes after death is through a trust. Trusts can hold property and assets, reduce or eliminate estate taxes and avoid probate. You can also create a trust to benefit another person during their lifetime as well as after death.
A power of attorney designates someone as your agent to act on your behalf for financial matters in case you become incapacitated or unable to make your own decisions.
This can include authorizing them to pay bills and sign legal documents on your behalf. A healthcare declaration (also called an advance directive) deals with medical decisions and should be drafted in conjunction with a living will so that doctors know what treatments you wish or don’t wish to receive if you are unable to make those decisions yourself.
Life insurance proceeds are usually not considered part of the taxable estate because they pass directly to beneficiaries outside of probate, but there are some exceptions.
Tax Considerations
If you are thinking about leaving your estate to family, friends or a charitable organization, you need to consider the tax implications of your wishes and plan accordingly. Inheritance taxes can significantly reduce the amount that your beneficiaries will receive and may even wipe out an inheritance altogether. Even if there are no inheritance taxes in your state, the federal estate tax could still apply.
Here’s what you need to know about inheritance taxes:
Inheritance tax basics
Inheritance taxes are also called death duties. They are imposed by states on amounts inherited by beneficiaries from an estate. The rates vary depending on the relationship between the deceased and the beneficiary. For example, spouses may pay nothing; children may pay less than cousins or friends; charitable organizations usually pay nothing.
Inheritance tax vs. Estate tax
Estate taxes and inheritance taxes are not exactly the same thing, although they are often confused. Estate taxes are based on the total value of an estate before any gifts or bequests have been made; in contrast, inheritance taxes are based on the value of individual bequests after an estate has been distributed.
Another difference is that only a few states impose inheritance taxes; nearly all states impose estate taxes, although exemptions vary widely.
Trusts and Foundations
Trusts and foundations provide structure and direction with respect to the distribution of assets while protecting your heirs from financial catastrophes or misappropriation of funds.
Here is how trusts and foundations work:
A trust is created by one party (the grantor) who transfers assets to another party (the trustee) for the benefit of a third party (the beneficiary).
A foundation is also established by a grantor, but it is operated by a board of trustees and funds are distributed for charitable purposes such as education or religion.
Both can be established during life or upon death through a will.
Investment Strategies
Wealthy individuals have unique needs when it comes to planning for the future, particularly when it comes to inheritance.
Wealth preservation, asset protection, and effective tax planning are some of the top financial goals for high-net-worth families.
When carefully planned, a will not only provides assurance that your assets will be distributed according to your wishes upon your passing but also helps ensure that heirs pay less tax on the inheritance.
I first want to say that receiving a lump sum of money can be overwhelming but it can also be a wonderful opportunity. If you are going to invest this money I would recommend investing in index funds, which are funds that track the value of large indexes like the S&P 500 or Dow Jones Industrial Average. These funds have historically had higher returns than other forms of investments and they are very low cost because they do not require the constant management that individual stocks require.
I would also recommend consulting a financial planner. A good one will help you develop an investment plan and help you stay on target with your retirement savings.
They can also help you decide if this inheritance is enough for you to retire now or if you will have to continue earning income for a number of years before you retire.
Conclusion
Every single high-net-worth family is unique, and each will have its own needs. The challenge with these type of families is that you can never assume what assets are at play or which ones will be involved in the estate plan.
This is where inheritance planning starts to get complicated but it doesn’t have to be. The first step to high net worth planning is to sit down with your estate planning team and discuss in detail, the nuances of your high-net-worth family, income sources, net worth, new additions since your last financial plan, and future plans for care.