Ultra High Net Worth Estate Planning

With estate exemption limits set to reduce to roughly $12 million ($M) per married couple in 2026 compared to $26 million today, UHNW clients who otherwise wouldn’t be facing an estate tax issue are now tasked with trying to find solutions to these issues

There are a number of ways to address this for UHNW clients and their advisors.

Utilizing Grantor Annuity Trusts (GRATs) or Intentionally Defective Grantor Trusts (IDGTs) are some of the best ways to accomplish this. Both of these vehicles allow clients the ability to move assets outside of their estates, so that all the future appreciation of these assets will be free from the estate tax when they die. Given that the estate tax rate is currently at 40%, this amounts to millions of dollars of more after-tax wealth that would pass on to their beneficiaries simply by using estate planning strategies like this.

Furthermore, if clients use discounted valuation practices and gifting strategies in combination with these grantor trust strategies, clients can move assets outside of their estate while limiting the amount of their current ~$26M gift exemption they have to use to do so. This is more after-tax wealth for the client. For example, if a client moves her $26M business outside of his estate, while only using $16 million of her gift exemption limit, that’s an extra $10 million in gift exemption she can use against her other assets. At a 40% estate tax rate, that’s a savings of $4 million.

Annuity Products

These grantor trust benefits come with a number of downside risks that need to be considered

The biggest one is that if the grantor passes away before the term of the annuity, then all of the assets in the GRAT are included in the grantor’s estate and subject to the estate tax—which defeats the purpose of the GRAT to begin with.

Another huge disadvantage of GRAT strategies is that the assets within the trust are either taxable to the grantor or the beneficiary and lose the benefit of step-up in basis when the grantor passes away.

Estate planning toolAssets outside of estateAbility to take loans for liquidityAssets not included in estate if grantor dies earlyTax-free growthStep-Up in Basis at DeathValue independent on interest rates
Grantor Trusts x x
PPLI x x x x x x

PPLI offers a number of key advantages over grantor trust strategies: protection against early death of the grantor, tax-free growth, step-up in basis at death, and increased value in high interest rate environments.

Utilizing thoughtful and deliberate life insurance strategies can solve the downsides associated with these GRAT strategies. It’s also extremely important for business owners looking to sell their business to address how they can combine estate planning strategies, discounted valuation practices, and life insurance benefits to maximize the after-tax wealth left to their beneficiaries well before they actually intend to sell the business.

Colva works in-depth with the estate attorneys, CPAs, family offices, and investment advisors of UHNW clients to help implement strategic and efficient life insurance strategies so that it amplifies the estate and investment plans that these clients already have in place.

To learn more how we can do this for you or your clients, feel free to reach out to us at [email protected] or book a call using the form below.