5 Year-End Estate Planning Trends For High-Net-Worth Clients To Consider
High-net-worth individuals may grapple with the complexities of large estates, expansive assets, and high-value investment portfolios. Their estates may also often encompass family businesses and multiple properties, making the distribution of assets more challenging. Beyond being a complex legal formality, this process empowers individuals to smoothly transfer their wealth to successive generations while addressing tax liabilities, optimizing financial security, and safeguarding hard-earned assets. This is why estate planning for high-net-worth families demands a strategic and comprehensive approach. As the year ends, it presents a strategic opportunity for high-net-worth individuals to reassess and enhance their estate plans.
You may consult with a financial advisor who can help you understand and implement suitable estate planning strategies for high-net-worth estates. This article will discuss five estate planning trends and strategies that you can consider as 2023 ends and 2024 approaches.
Below are 5 estate planning strategies that high-net-worth individuals can implement at the end of the year:
1. Gifting in order to claim gift tax exemptions
As the year comes to a close, the tradition of gift-giving takes center stage. The festive spirit and a sense of general merriment typically fuel this. Gifting plays a crucial role in estate planning. It is an excellent way to transfer your assets to your loved ones and minimize taxes. However, before diving into the gifting tradition, it helps to understand the prevailing gift tax rules clearly.
The Internal Revenue Service (IRS) sets the annual gift tax exclusion. This exclusion refers to the amount of money an individual can give to another person each year without incurring any gift tax. In 2024, this exclusion is $18,000. This means that you can give up to $18,000 to any recipient without paying taxes on the gift. For married couples, both partners can use individual limits. This means that each spouse can contribute up to the annual exclusion amount and give a total of $36,000 annually per recipient. This can effectively allow married couples to leverage gift tax exclusions and transfer assets to their heirs without incurring gift taxes. It is important to note that while the annual gift tax exclusion provides a tax-free way to transfer assets each year, any gifts exceeding this amount may be subject to tax.
In 2024, the annual limit for gifts to a non-US citizen spouse will rise to $185,000. Concurrently, the lifetime estate and gift tax exemption per individual will be $13.61 million for gifts. This is a remarkable increase from $12.92 million in 2023. With the new limits, a married couple can save a total of $27.22 million from federal estate or gift tax. For couples who have already maximized lifetime gifts, this translates to an additional $1.38 million that can be gifted starting in 2024. While unlimited transfers are allowed between spouses who are both US citizens, gifts to a non-US citizen spouse have limitations. This is because a non-US citizen spouse is not subject to US estate tax and, therefore, cannot receive unlimited assets. For the calendar year 2024, the initial $185,000 of gifts to a non-US citizen spouse falls under the annual exclusion amount. So, it is not considered in the total taxable gifts.
Any gifts surpassing the annual exclusion will trigger a gift tax return. In such a case, you will be required to file a gift tax return with the IRS. The deadline for filing this return is April 15 of the following year, in which the gifts were made.
2. Making tax-deductible donations
As the year ends, high-net-worth individuals often turn their attention to philanthropic endeavors. Charitable giving serves a noble cause but, at the same time, holds financial implications for high-estate individuals. It is one of the best high-net-worth individual tax strategies, as contributions to charities approved by the IRS carry tax benefits. However, you must adhere to some rules to avail of a tax-deductible donation.
In general, you can deduct up to 60% of your Adjusted Gross Income (AGI) if you make charitable donations. However, you may be subjected to specific limitations, ranging from 20%, 30%, or 50%, depending on the nature of the contribution and the organization you donate to. Your charitable giving must be directed to a tax-exempt organization as specified under Section 501(c)(3) of the Internal Revenue Code (IRC) to qualify for a tax deduction. If you make a non-cash donation of at least $500, you must fill out Form 8283. You also need to attach an appraisal if the items exceed a total value of $5,000. Additionally, cash or property donations exceeding $250 require a written acknowledgment from the charity. This must specify the donated amount or an estimate of the value of any goods or services donated.
Timing is critical for tax-deductible donations. A donation must be made by the end of that corresponding year to be considered in the tax year. For instance, donations made until December 31, 2023, can be claimed on the 2023 tax return filed by April 2024. When you file your tax return in 2024, you must itemize your deductions or opt for the standard deduction when filing tax returns to claim tax-deductible donations to charity. You can do this by completing Schedule A along with the rest of the tax return.
Here are the standard deduction amounts for the years 2023 and 2024:
| Tax status | 2023 | 2024 |
| Single taxpayers | $13,850 | $14,600 |
| Married individuals filing separately | $13,850 | $14,600 |
| Married individuals filing jointly | $27,700 | $29,200 |
| Heads of household | $20,800 | $21,900 |
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3. Making charitable donations through Qualified Charitable Distributions (QCDs)
QCDs are another trend in estate planning for high-net-worth individuals this year. The strategic use of QCDs offers a tax-efficient method for high-net-worth individuals to support charitable causes while optimizing estate planning. A QCD refers to a direct transfer of money from your IRA custodian to a qualified charity. A traditional IRA has mandatory distributions starting from the age of 73. These are known as Required Minimum Distributions (RMDs). The failure to take RMDs imposes a 10% penalty, thereby affecting your IRA returns. QCDs can substitute your RMDs for a year and offer you a tax break. Since you are supporting a charitable cause, a QCD provides the additional advantage of excluding the donated amount from your taxable income. But you need to meet certain criteria to avail of this tax benefit.
You must be 70.5 years or older to be eligible for a QCD. The maximum annual amount qualifying for a QCD is $100,000.00, with indexing starting in 2024. This limit applies to the total QCDs made to one or more charities within a calendar year. In the case of joint tax filers, each spouse can make a QCD from their own IRA and make a combined QCD of up to $200,000. An essential point to note is that any amount donated above the RMD does not contribute to satisfying a future year’s RMD. It will simply be taxed in the year it is made.
The RMD deadline can have an impact on your deductions. Funds must be withdrawn from the IRA by the RMD deadline, which is typically December 31, to count towards the current year’s RMD. Moreover, contributions made to an IRA may affect the deductible amount of QCDs. Deductible IRA contributions made after reaching the age of 70.5 years reduce the non-includible portion of the QCD in your gross income.
Another vital point to keep in mind when opting for QCDs is that if you receive funds directly from your IRA and then donate to charity, it does not qualify as a QCD. In certain circumstances, QCDs may be made from Roth IRAs, even though Roth accounts are not subject to RMDs during the owner’s lifetime, and distributions are typically tax-free. Having said that, state tax rules may vary for QCDs. A QCD is reported as a regular distribution on IRS Form 1099-R for non-inherited IRAs. However, it is reported as a death distribution for inherited traditional and Roth IRAs. It is recommended to consult a tax advisor for guidance.
4. Using the annual gift exemption to fund a 529 education savings account
Utilizing the annual gift exemption presents an advantageous strategy for funding a 529 plan. The gift tax exclusion in the 2023 tax year stands at $17,000 per recipient. In 2024, the limit will be increased to $18,000. This means you can contribute up to $17,000 into different 529 plans until the end of 2023 and $18,000 in 2024. For example, if you have multiple beneficiaries, such as two children and a nephew, you can contribute to all of their accounts in the same year. Your spouse can also gift up to $17,000/ $18,000 limit to the same recipients in the same year without surpassing the annual gift exclusion limit. Even if your contributions exceed the limit, the likelihood of incurring the gift tax is minimal. But in the event that your gifts surpass the $17,000 annual exclusion in 2023, the excess amount needs to be reported on Form 709 when you file your taxes in April 2024. However, it will not necessarily trigger an immediate gift tax obligation. Instead, it will count against your lifetime gift and estate tax exemption. The total of your lifetime gifts beyond the annual exclusion amount must exceed your lifetime exemption before the gift tax becomes applicable.
It is important to note that the annual exclusion applies to each gift for each recipient. So, if you wish to gift $17,000/ $18,000 to five different recipients, you would receive an annual exclusion for each individual gift.
The IRC also includes a specific provision for 529 plan contributions that allows you to make a lump sum contribution equivalent to five times the annual gift tax exclusion. You can spread this over five years. For the 2023 tax year, this means you can contribute up to $85,000 to a 529 account before the year ends. However, keep in mind that if you opt for the five-year averaging rule, filing Form 709 becomes necessary to manage and report these contributions effectively.
5. Having discussions with beneficiaries
Engaging in discussions with your beneficiaries is a noteworthy trend in estate planning for high-net-worth individuals. Having open conversations with your children and grandchildren about your wealth and inheritance plans is crucial. Firstly, it establishes a foundation of transparency and trust within the family. Furthermore, involving your children and grandchildren in these discussions allows them to understand your values, intentions, and the legacy you wish to leave behind. This is especially true if you have a family business and are contemplating succession strategies. Discussing succession plans, business operations, and your vision for your company can ensure a smoother transition and help align family members with the business’s goals.
It is equally important to communicate with minors and ensure they are aware of your intentions, including discussions about trustees. Selecting the right trustee is a critical aspect of estate planning. The trustee plays a crucial role in managing your assets and investments and ensuring your wishes are fulfilled in your absence. When choosing a trustee, appointing someone who will act in your best interests and fulfill their fiduciary duties toward your estate is essential.
Talking openly about your estate plans can help prepare the next generation to manage a large inherited estate. It allows them to ask questions and seek clarifications to be well-prepared for the future.
To conclude
Estate planning is a cornerstone of financial planning for individuals with substantial wealth. As the year ends, it is an opportune moment for high-net-worth individuals to reassess and enhance their estate plans. Staying informed about trends in estate planning can help you make informed decisions to protect and manage your wealth. But keep in mind that estate planning is highly individualized, and what works for one person may not work for another. Therefore, it is essential to customize your plan based on your unique situation and goals. It may also be advised to review and update your estate plan over time to ensure that it remains aligned with your wishes and adapts to changes in your life.
Help secure your family’s financial future and effectively transfer your wealth with the expertise of a vetted professional financial advisor. Use the free advisor match service to get matched with a suitable financial advisor who can devise an estate plan as per your needs. Answer some simple questions about your financial needs, and our matching tool can connect you with 1 to 3 advisors who can best fulfill your financial requirements.
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