Simona Ondrejkova, CFP

Sep 29, 2023

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Estate planning for high-net-worth and ultra-high-net-worth individuals

While everyone can benefit from a properly structured estate plan, it becomes even more critical for those with higher levels of wealth. High net worth and ultra-high net worth families often face unique challenges that may demand more sophisticated approaches to preserve and protect their wealth.

Estate planning for high net worth individuals often starts with the same foundation as for smaller estates. But because larger estates are more likely to be exposed to estate taxes, creditors, and family or business conflicts, additional planning is required to mitigate these and other risks.

Before offering several strategies that advisors and clients can use to optimize high net worth estate planning, let’s begin by clarifying what we mean by “high net worth.”

What is considered a high net worth estate?

For estate planning purposes, it can be helpful to categorize estates based on their exposure to estate taxes. This is because estate taxes apply after an estate reaches the estate tax exemption amount (currently at $13.61 million per individual or $27.22 per couple in 2024).

After the 2026 estate tax exemption sunset comes into effect, however, the threshold to pay estate taxes will be about half of the current amount (adjusted for inflation). This means that anyone who expects their estate to grow to $8 million or more should be planning for the possibility of future federal estate taxes. In addition, it’s important to note that individuals with this level of wealth may also be subject to state estate taxes which may have a much lower threshold. State estate tax exemptions for some states, for example, may only cover the first million of assets, exposing even those with less than $8 million to state estate taxes.

While amassing wealth up to $8 million is certainly significant, estate planning really starts to shift above this level. This leads us to high net worth and ultra high net worth estates.

High net worth estates

An estate greater than $8 million could potentially incur estate taxes based on the estate tax legislation in place at the time of death. Once the 2026 estate tax exemption sunset slashes the current estate tax exemption roughly in half, individuals with more than $8 million or couples with more than $16 million may need to lean on more advanced estate planning strategies to reduce their estate tax liability.

Ultra-high net worth (UHNW) estates

The need for ultra-high net worth legacy planning comes around the $25 million estate level. Though it’s different for every client, this is often where a client’s focus shifts from funding their own lifestyle to minimizing estate taxes, planning for multigenerational wealth transfer, and considering business succession or liquidity planning.

With the above guidelines in mind, let’s look at some of the basics that all high net worth families should have in place before considering challenges more unique to ultra-high net worth (UHNW) estates.

Foundational estate planning strategies for high net worth individuals

Regardless of their level of wealth, all high net worth individuals should consider the following estate planning tools as a foundation to their plan:

• A will to specify how assets should be distributed after death and name legal guardians for any minor children or special needs beneficiaries. When using a will together with a revocable trust, the will is typically a “pour-over” will. This means that any assets passing via the will are distributed or “poured into” the revocable trust to pass according to its terms.
• Trusts to transfer assets to beneficiaries according to predetermined instructions while avoiding probate. From a foundational estate planning perspective, a revocable trust is typically put in place first. Irrevocable trusts are then used for additional, advanced planning strategies. Download our guide to trusts for estate planning to learn more about the different types of trusts, their pros and cons, and several advanced strategies that high net worth individuals should consider.
• Healthcare directives to outline medical treatment preferences and appoint a healthcare proxy in case of incapacity or inability to make healthcare decisions.
• Power of attorney to name a trusted person to act on the clients’ behalf in financial, legal, or medical matters when the client is unable to do so themselves.

To simplify the estate planning process for those who have not yet done any estate planning, use our estate planning checklist to gather the essential documents needed to get started.

5 unique challenges (and their solutions) for high net worth estate planning

According to Vanilla’s latest state of estate planning report, the top concerns for high net worth individuals include leaving their loved ones enough capital to live on, avoiding conflict among heirs, and minimizing taxes (in that order). UHNW individuals are no different. Here are some solutions to these and other unique challenges that high net worth and UHNW individuals face:

1. Family conflict minimization

Greater levels of wealth often introduce greater concerns for an equitable distribution of assets among family members. While everyone’s definition of “fair” is different, there is a difference between an equal and an equitable distribution of assets which could lead to potential family conflict. As explained further here, an equitable distribution might be one where each child receives a different inheritance amount based on their personal needs and current financial situation, even if that means the children won’t receive an equal amount.

One of the best ways clients can reduce family tension and resentment after their death is clear communication and setting expectations ahead of time. Teaching children about financial responsibility early on can help them manage wealth wisely and reduce emotional tension when conflicts arise. Discussing estate planning with trusted family members and leaning on the guidance of trusted advisors and attorneys can prevent avoidable conflicts through proper planning. Families with larger estates also need to consider the implications of multigenerational wealth transfer such as generation-skipping gifts.

2. Privacy and creditor risk protection

To protect the privacy of their wealth and private affairs, high net worth families often utilize trusts to avoid public probate proceedings. In addition, clients with larger estates may face a higher exposure to potential creditors. Utilizing irrevocable trusts or gifting can remove assets from clients’ estates so those assets are longer subject to the client’s creditors. Maintaining liability insurance can provide a layer of protection to reduce the need for drawing down assets to settle unexpected lawsuits. 

3. Liquidity for estate settlement expenses

It’s not uncommon for high net worth and UHNW families to have a large chunk of their wealth tied up in business interests, real estate, or other personal property. To avoid selling assets for less than their fair value to cover estate taxes or attorney fees, it helps to plan for covering these expenses in advance. When structured properly (such as inside an ILIT), life insurance can provide needed liquidity without raising a client’s estate taxes. 

4. Effective business succession planning

High net worth individuals who own a business need to ensure a smooth transition of their business upon death while also minimizing taxes and providing financial security for loved ones. Some strategies to consider include Limited Liability Companies (LLCs) and Family Limited Partnerships (FLPs) which can offer liability protection while providing control over the distribution of assets to family members.

5. Addressing philanthropic aspirations

High net worth and UHNW legacy planning often involve charitable giving. Many high net worth clients with assets that surpass their own needs often have a charitable intent. Their philanthropic aspirations could help them leave a legacy while reducing their estate tax bill (and possibly their income tax bill as well). You can learn more about using lifetime and annual gifts to address philanthropic aspirations and minimize taxes in our Guide to Gifting.

Estate tax planning for high net worth individuals

Because their estates are likely to exceed the gift and estate tax exemption, high net worth and UHNW individuals should consider gifting and irrevocable trusts to reduce their taxable estate. These two strategies allow clients to transfer their assets to an individual or an entity that can then use those assets for their benefit. 

Unlike outright gifts, trusts allow clients to be more specific about how the gifted assets should be distributed. Trust structures such as Grantor Retained Annuity Trusts (GRATs) or Charitable Remainder Trusts (CRTs) also allow the client to receive an income stream for a period of time.

Married clients should also take advantage of the marital deduction to reduce their estate taxes. This can be done by making a portability election when filing the deceased spouse’s estate tax return or utilizing trusts such as QTIPs (Qualified Terminable Interest Property). Keep in mind that the marital deduction may not eliminate estate taxes entirely as they may still be due upon the second spouse’s passing, depending on the size of the remaining estate.

Capital gains and income tax planning for high net worth individuals

It’s not uncommon for high net worth clients to hold highly appreciated assets. This makes it important for advisors to incorporate estate tax planning with income tax planning when managing client assets. Because these clients are typically in the highest income tax brackets, they might benefit from strategies such as tax loss harvesting and putting assets into trusts to defer or eliminate capital gains.

Being strategic about which assets are used first to meet liquidity needs can also help mitigate taxes. For example, when a couple needs $2 million to purchase a luxury yacht, which bucket of assets should this come from? In this case, using taxable assets with an unrealized loss could help reduce income taxes.

Many estate tax reduction strategies that reduce capital gains and income taxes involve gifting. While we explain our top 7 gifting strategies for estate planning in a separate article, here’s an overview of the three most common tax planning strategies that high net worth and UHNW clients may want to consider:

1. Annual and lifetime gifting

High net worth individuals can save on estate taxes by leveraging the annual gift tax exclusion ($18,000 per recipient in 2024) and the lifetime gift exemption ($13.61 per individual in 2024). Additionally, they can make direct payments for educational and medical expenses. These gifts, in any amount, qualify for an exclusion from gift tax, allowing individuals to support loved ones while at the same time reducing their taxable estate. 

For those individuals who are charitably inclined, assets gifted to charity receive an unlimited charitable deduction for gift tax purposes that applies to any amount given to charity. An income tax charitable deduction may be available as well.

2. Charitable Remainder Trusts

Clients who wish to receive lifetime income and are comfortable gifting their assets to a charity could consider a Charitable Remainder Trust (CRT). After funding an irrevocable trust with cash or appreciated assets, clients will retain an income stream based on either a fixed amount (Charitable Remainder Annuity Trust or CRAT) or a percentage of the gifted assets (Charitable Remainder Unitrust or CRUT) for the term of the trust. This allows clients to potentially save on capital gains taxes and receive an upfront income tax charitable deduction equal to the present value of the remainder interest that will pass to charity at the end of the trust term.

3. Donor Advised Funds

Donor Advised Funds (DAFs) allow clients to place their assets into a bucket that will then be distributed to one or multiple charities. DAFs offer several benefits, including an immediate income tax deduction for the donor, the flexibility to time charitable donations based on other financial considerations, and the ease of doing all charitable gifting through one single account.

Other considerations for high net worth estate planning

Taking care of their family, leaving a meaningful legacy, and minimizing estate taxes are important to most high net worth individuals, regardless of the size of their estate. It’s also not uncommon for these individuals to have additional concerns such as spendthrift heirs or, in some cases, planning for individuals with special needs. Trusts can be set up to ensure that heirs inherit assets in a structured manner to support their essential needs, while minimizing exposure to negative habits, unscrupulous trustees, and preventing negative implications to governmental benefits, if applicable.

It’s also important to keep in mind that in addition to federal estate taxes, certain states also impose their own inheritance, gift, and estate taxes. Because of the nuances involved in estate tax planning, advisors should recommend that clients seek the counsel of a qualified estate planning attorney in their state. To help high net worth clients understand their estate’s future and potential tax savings, consider using an estate planning software like Vanilla to guide clients in maximizing their legacy in a way that aligns with their unique wishes and goals.