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, ultra high net worth UHNW clients who otherwise wouldn’t be facing an estate tax issue are now tasked with trying to find solutions to these issues
GRATs are the typical go to strategy–but expose clients to income tax issues and loss of step-up in basis that only life insurance strategies can fix
Utilizing Grantor Annuity Trusts (GRATs) or Intentionally Defective Grantor Trusts (IDGTs) are default estate planning strategies for ultra high net worth individuals. 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 tax 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.
However, these grantor trust benefits come with a number of downside risks that need to be considered
The biggest issue with grantor trusts 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.
Furthermore, if annuity payments have to be made back to the grantor then assets have to be sold in order to make these payments. This introduces additional tax-drag to the use of grantor trust strategies.
Due to these issues, UHNW clients can be worse off by using GRATs instead of keeping the assets in the estate as we illustrated in an in-depth article for the National Association of Estate Planners (NAEPC) that can be found here. This is why ultra high net worth tax planning and UHNW wealth management require careful consideration of all available strategies.
For those seeking estate planning San Diego services or UHNWI services elsewhere, it’s crucial to work with professionals who understand and can implement high net worth tax strategies that truly benefit the client’s unique situation.
| Estate planning tool | Assets outside of estate | Ability to take loans for liquidity | Assets not included in estate if grantor dies early | Tax-free growth | Step-Up in Basis at Death | Value independent on interest rates |
|---|---|---|---|---|---|---|
| Grantor Trusts | x | x | ||||
| Life Insurance | x | x | x | x | x | x |
Life insurance 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 for high net worth individuals, 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 UHNW clients’ investment advisors, estate planning attorneys, CPAs, family offices to help implement strategic and efficient life insurance strategies so that it amplifies the estate planning and investment plans that these clients already have in place. Our approach incorporates high net worth tax strategies and ultra high net worth tax planning to ensure comprehensive wealth preservation.
Our UHNWI services are designed to complement existing tax planning strategies, providing a holistic approach to UHNW wealth management. Whether you’re seeking estate planning San Diego services or assistance anywhere else, our team understands the unique challenges and opportunities faced by high net worth individuals.
To learn more how we can do this for you or your clients, feel free to reach out to us at [email protected]