Different estate taxes will come into play when managing finances for a high-net-worth family. It’s essential to be well-versed in how estate tax affects a family’s assets to ensure the best action plan is selected. Here are some suggestions from Cook Tilman on how to maximize tax efficiency for a high-net-worth family.
Key Estate Tax Considerations When Integrating Estate Planning Strategies Into Financial Plans
The primary tax in estate planning is the estate tax, which is a 40% tax on the value of an individual's estate that exceeds the estate tax exemption at the time of passing. For 2024, the federal estate tax exemption is $13.61 million per person or $27.22 million for a married couple. Here are the four most common options for planning with a taxable estate.
Pay the Tax: One option is to take no action and pay the tax. The problem with this avenue is that there usually aren’t enough liquid assets to pay the tax when it is due. This forces the estate to sell illiquid assets at an inopportune time. For example, a client’s estate may be forced to sell commercial real estate in a down market. The client could also face potential penalties and interest for late payments if they cannot raise the needed liquidity before the tax deadline.
Irrevocable Life Insurance Trust: Another option is to create a pool of liquidity in the form of a life insurance policy owned by an irrevocable trust. The death benefit is paid to the trust upon the client's death, so the amounts are excluded from his or her estate for federal tax purposes. Such amounts may then be used to pay any estate tax liability incurred by the estate. Such a policy may be purchased on the life of an individual client (single-life policy) or, in the case of a married couple, on the life of the spouse who is second to die (survivor life policy).
Spousal Lifetime Access Trust: A spousal lifetime access trust (SLAT) is an irrevocable trust that holds assets expected to appreciate. One spouse creates it for the benefit of the other and, in some cases, the children. A SLAT may be funded with assets up to the client’s remaining federal estate tax exemption (currently $13.61 million). The assets in the SLAT are not included in his or her estate for estate tax purposes and are also not in the beneficiary spouse’s estate. At the beneficiary spouse's death, the assets (and all accumulated appreciation) remain in trust for their children's estate tax-free. The SLAT allows the client to capture his or her expiring estate tax and generation-skipping tax exemptions. It keeps the asset appreciation from being subject to future estate and generation-skipping transfer tax.
Charitable Lead Trust: Planning within specific statutory requirements, a client’s estate plan can, upon their death, provide that any amounts of their estate subject to estate tax will be contributed to an irrevocable trust that will pay to charity over the term of the trust a certain percentage mandated by the IRS. Ultimately, any balance is payable to the client’s beneficiaries free from tax.
Upcoming Changes in Estate Tax Laws and Regulations
While the current estate tax exemption of $13.61 million for an individual has kept many clients’ estates in the nontaxable realm, that may change beginning January 1, 2026. Absent congressional action, the historically high exemption will be cut in half when the 2017 Tax Cuts and Jobs Act expires at the end of 2025. As a result, individuals having a net worth exceeding $7 million (approximately) and married couples with a joint net worth exceeding $14 million (approximately) will have to contend with the estate tax once again. Proper planning, therefore, requires forethought and action. Opportunities should be explored to best use the high exemptions before they decrease. We encourage financial planners to identify clients that fall in the category and connect with Cook Tillman on how to take advantage of the opportunity, ideally before the summertime of 2025, so they can be resolved before 2026.
How Financial Planners Can Collaborate With Cook Tillman to Maximize Estate Tax Efficiency
If you’re a financial planner with clients who have a taxable estate and are likely to have more after the exemption sunsets in 2026, you must take proactive steps to maximize your clients’ tax savings on their estate. Our team at Cook Tillman is available to answer questions and provide continuing education seminars to aid financial planners with any questions or concerns.
At Cook Tillman, we are motivated to help financial planners navigate taxes and estate planning with their clients. Unique situations arise when dealing with clients with a high net worth, but this can be handled with thoughtful, informed planning. Have questions? Contact us at (615)-370 2444 or via our website.