How Do Tax Implications Shape Estate Planning Strategies for High-Net-Worth Individuals?

What is the Value of Thoughtful Estate Planning for High-Net-Worth Individuals?

Estate planning for high-net-worth individuals is crucial due to the need to protect and transfer substantial assets while limiting the potential tax implications. High-net-worth individuals making plans for the future of their estate face the challenges of mitigating estate and capital gains taxes, protecting their assets from creditors, and avoiding costly family or business partner conflicts, which require more sophisticated approaches to preserve and safeguard their wealth. Without a carefully crafted plan, you can lose a substantial portion of your estate to taxes during and after your lifetime, leaving less for your loved ones and charitable causes. 

Working with skilled legal advisors to develop a comprehensive estate plan that addresses these tax implications and aligns with your financial goals and objectives is vital. Every estate is unique and requires careful attention and a tailored approach to ensure the best possible outcomes. A New York estate planning lawyer can help you utilize strategies to minimize taxes and costs for your high-net-worth estate, such as gifting, irrevocable trusts, life insurance policies, family limited partnerships, and private foundations. 

How Does New York’s Estate Tax Cliff Impact Valuable Estates?

New York is one of a handful of states which impose an estate tax on high-net-worth estates. This tax is in addition to the federal estate tax levied on assets at the time of an individual’s passing. The New York estate tax rate ranges from 3.06% to 16%, which could take a significant portion of your heirs’ inheritances.

Estates exceeding the state’s basic exclusion amount by less than five percent will only need to pay taxes on the amount beyond the exemption limit. The exclusion amount is adjusted yearly. In 2023, the basic exclusion amount is $6,580,000. If the value of your assets passing to beneficiaries other than a charitable organization or spouse is above this limit, you will be subject to the New York estate tax.

The so-called New York “tax cliff” comes into play when the value of an estate exceeds the basic exclusion amount by more than five percent. At this point, the entire value of your estate will be subject to taxation at a high rate, as opposed to only the amount over the exemption limit. Avoiding this expensive tax cliff through adequate estate planning is key to preserving your financial legacy for your loved ones.

Which Estate Planning Strategies Could Be Useful for a High-Net-Worth Estate?

You have put considerable effort into growing and maintaining your business endeavors, real estate, investments, and other property during your lifetime. By consulting with your financial advisor and an experienced New York asset protection attorney, you can implement a plan to secure your hard-earned wealth for the benefit of the next generation. Your legal team will likely employ some or all of the following estate planning tools to help you meet your goals and reduce your tax burden.

Charitable Giving

Donating a portion of your estate to charities can help fund causes you believe in while ensuring your estate does not exceed the basic exclusion amount for estate taxes. You may achieve this result through several means, including:

• Irrevocable charitable trusts: Charitable trusts can be a valuable tool for tax planning. Because the assets you place into the trust are no longer considered part of your estate, they are protected from creditors and are not subject to tax calculations. You may also receive an immediate income tax deduction for your donations. Certain types of trusts even allow the grantor to retain some income generated by the trust’s assets during their lifetime.
• Donor Advised Funds (DAFs): A DAF is a charitable investment account you can fund with assets. Your donations are tax-deductible but also irrevocable, meaning the funds can only be used to make grants to IRS-qualified public charities. DAFs are a popular charitable giving vehicle because they are relatively easy to set up and provide significant tax benefits to donors.
• Special terms within your will: It can be challenging to know the exact value of your estate prior to your passing. To ensure you do not go over the tax cliff, your lawyer may add a conditional bequest to your will that donates any assets exceeding the exclusion amount to charities of your choosing.

Gifting

Reducing the value of your taxable estate can help you lessen the taxes your beneficiaries must pay. One way to achieve this reduction is to utilize the annual federal gift tax exclusion. In 2023, this exclusion is $17,000 per recipient, meaning you can give that amount to loved ones tax-free every year. New York has no state gift tax. However, residents must plan carefully when using this strategy because the state has a “clawback” rule on gifts that exceed the federal per-person exclusion amount. Under this rule, any gifts made in the three years before the decedent’s passing that are beyond the exclusion value will be added to the estate’s value for the purpose of calculating the estate tax. Your lawyer or financial advisor can guide you on how to use gifting to your best advantage during the estate planning process.

Trusts

Many varieties of trusts exist for different purposes. Some allow you to structure financial gifts to family members to protect the money from poor spending habits, legal troubles, or other issues that could endanger the inheritance. Other trusts may be set up to provide care for family members with special needs, hold funds you wish to give to charity, or make the transfer of assets to your spouse or family members easier. In all cases, if the trust is irrevocable, the assets placed into it are no longer counted toward your estate’s value, making trusts a valuable tax planning vehicle.

How Can a Skilled Estate Planning Attorney Assist You?

Minimizing tax implications and increasing the value of the estate you pass on to your heirs is critical to a solid estate plan for high-net-worth individuals. Unfortunately, state and federal tax law is ever-changing. Effectively navigating the estate planning process requires detailed legal knowledge and a thorough understanding of every choice’s nuances and long-term effects. Early preparation is often crucial because some strategies take several years to implement effectively. To begin creating a robust plan for your high-value estate with a committed and experienced legal team, contact Davidov Law Group at 516-253-1366 to schedule your assessment.