Estate Planning for Millionaires

Estate planning for millionaires is crucial, as wealthy families have more to protect and pass on to the next generation. Larger estates tend to be more complicated, with multiple homes, business interests, bank and investment accounts, cars, boats, jewelry, and other assets.

Proper estate planning will organize your financial affairs so your heirs will not be left with a complicated mess after you are gone. “A well-thought-out plan can be a gift in and of itself to your heirs,” said Matthew Fleming, senior wealth advisor at Vanguard. It also ensures that your beneficiaries get what you set aside for them and minimizes the tax liability for everyone.

Estate planning for millionaires: first steps

If you have not created an estate plan yet, you are in good company: Only 26% of Americans have one in place, according to a survey by FreeWill, a DIY estate planning firm. However, for people with over $500,000 in assets, more than 50% have a plan in place — especially if they are men.

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The financial services industry classifies wealthy clients into several groups according to the value of liquid assets owned. (Liquid assets exclude your home, collectibles and other valuables you can't easily invest.) These tiers range from ordinary investors to ultra-high-net-worth individuals (UHNWI) as demonstrated in the table below. These definitions vary; for example, some investment firms define ultra-high-net-worth individuals (UHWNI) as those having at least $25 million, and others define it as at least $30 or $50 million. 

Sources: TheStreet, SmartAsset.com

These classifications can help you assess what kind of estate planning help you might need. The greater your liquid assets, the more likely you will need a bespoke plan created with a wealth management team. 

To get a sense of how your wealth compares to that of your age cohort, check out our articles on the average 401(k) balance by age and U.S. wealth tiers by age and how much money you need to be considered rich by most Americans. 

It's about people and paperwork

Estate planning does not have to be daunting, even for larger estates. Think of estate planning as a process about people and paperwork, recommends Vimala Snow, managing director and head of wealth strategy at Cresset Capital. She stresses the importance of appointing trusted individuals to oversee your affairs and making sure all the legal documents expressing your wishes are properly executed.

The people on your team. Hire an estate planning attorney to set up trusts and also help you choose a trustee. “Having somebody who’s almost like a quarterback for everything can be really helpful to help guide whom you should meet, when you should meet with them, and how complex it should be,” said Ryan Viktorin, vice president and financial consultant at Fidelity. Add a tax accountant and financial advisor to round out your team.

The trustee can be the owner of the assets, another person or a financial institution. If choosing another individual, “are they trustworthy? Can they coordinate all the moving parts?” Snow said. While they do not have to be financial or legal experts, “can they work with accountants and lawyers and financial advisors … and do that for the best interests of the beneficiaries?

The paperwork you need. Snow said everyone needs a few key documents: a will, revocable trust, powers of attorney for finances and health care and a living will. “The goal of all these documents is to provide the roadmap” for trustees and beneficiaries so you can “sleep well at night, knowing the right people will benefit and you will have the right decision-makers in charge.”

Federal and state estate taxes

Most estate plans start with a revocable trust to park their assets. It is “incredibly common,” Viktorin said. People like these trusts because “you still have full access. … You can revoke it at any time and it is still your money. The trust just dictates what happens to the estate upon your passing.”

If they have more assets to distribute and shield from taxes, they can set up irrevocable trusts as well. Unlike revocable trusts, these trusts require people to give up ownership and control of the assets placed inside them — with some exceptions. In exchange for owners giving up control, the assets in irrevocable trusts are not taxable to them.

The window for lower taxes may be closing. Advisors expect to see a rash of irrevocable trusts set up over the next year or so. People will want to take advantage of the current lifetime estate tax exemption of $13.61 million ($27.22 million for a married couple), which will be cut in half on Jan. 1, 2026, once the Tax Cuts and Jobs Act expires.

Keep in mind that some states also charge estate taxes, each with different rules, Viktorin said. Currently, 33 states do not levy these so-called ‘death’ taxes. If you live in a no-death-tax state but you move, make sure to revisit your estate plan in case your new state does charge them, Viktorin added.

In addition to the irrevocable trust, Viktorin detailed other commonly used trusts. An irrevocable life insurance trust (ILIT) would house your life insurance with instructions on how to distribute the payout upon your death. A special needs trust would provide for disabled loved ones without jeopardizing their government benefits. A charitable gift trust can help reduce taxes and satisfy philanthropic goals; ultra-high-net-worth families are most likely to employ charitable trusts.

Keep on gifting. Fleming said another way to shield assets from taxes is to use annual gift exclusions — you can give away $18,000 a year (or $36,000 for a couple) to as many people as you wish. “If you tally that up, that’s a significant amount of money you could give away annually,” he said. Also, paying the tuition or medical bills of anyone you want — if made directly to the school or health care provider — exempts these gifts from taxes. You can also put gifts in trust; these will not count towards the lifetime estate tax exemption.

If you want to gift larger amounts than the gift tax exemption, one way to do it is to loan money to family or friends, Fleming said. However, you must charge interest. The minimum interest you need to charge depends on the IRS’ applicable federal rates, which can fall below what the market charges. There are short-term (less than three years), mid-term (three to nine years) and long-term (more than nine years) rates and change monthly.

If you have assets abroad and you are a U.S. citizen, you potentially might have to pay taxes to the IRS. “Just because an asset might be overseas doesn’t mean that the U.S. doesn’t want to know,” Snow said. Keep in mind other countries have different tax laws so make sure to get local counsel.

Family conflicts and passwords

Snow said it could be a good idea to communicate to your beneficiaries about what they should expect from your estate — without sharing dollar figures. “Having people on board ahead of time can sometimes negate the negative family reaction,” she said. This lets you explain your decisions with the right context and perhaps avoid future conflicts. This conversation is especially critical for succession issues in a family business.

Finally, an often overlooked task is to make sure your trustees and beneficiaries will have access to your accounts, Snow said. Make sure they have passwords, tokens, digital keys and the location of your accounts.

With all the considerations that come with estate planning, it is easy to feel overwhelmed. Viktorin likes to keep things simple with clients. “My goal is always to help them create a plan that is as simple and streamlined as possible, but as sophisticated as necessary, given their situation.”

Read More

• The Basics of Estate Planning
• Most Expensive States for Millionaires in 2024
• Estate Planning for Women
• Six of the Best Assets to Inherit