Estate Planning Recommendations Based on Net Worth
A common misconception is that estate planning is only for wealthy individuals. While estate planning becomes more complex as your net worth increases, you will certainly benefit from building an estate plan carefully curated to your unique family and financial needs.
Besides, if you don’t have an estate plan in place, the State of Texas has a default plan for you. This means Texas (i) has a priority list of family members that will determine who makes lifetime medical and financial decisions for you, (ii) will designate who inherits your property when you pass away, and (iii) will choose who will serve as guardian of your minor children. The default plan under Texas law may include estranged family members, and often requires court intervention before someone can act on your behalf.
We thought it would be helpful to share a few common estate planning strategies and recommendations that focus on various increasing “bands” of net worth. However, please understand that these recommendations are general, and do not consider your unique family circumstances, such as age, inheritance expectations, earning potential, special needs of children, unique assets, and family background.
Whenever you are considering an estate plan, focus on building a strong foundation. From there, as your net worth increases, we can always add to this foundation.
Net Worth & Recommendations
$0 - $3mm: We generally recommend “Foundational” estate planning documents for those of you in the $3mm or less net worth range. These Foundational documents include:
1. Last Wills and Testaments;
2. Financial Powers of Attorney;
3. Medical Powers of Attorney;
4. HIPAA Authorizations;
5. Declarations of Guardians;
6. Directives to Physicians; and
7. Declarations of Guardians for Minor Children (if applicable).
Baker Heath Attorney, Ryan Heath, discussed these documents here.
$3mm - $10mm: If your net worth is between $3mm and $10mm, we generally recommend all of the Foundational documents discussed above, plus a revocable Living Trust. A revocable Living Trust takes the place of a traditional Will, and provides the following benefits:
1. Probate Avoidance;
2. Protection Against Incapacity;
3. Asset Protection (for future generations); and
4. Estate Tax Benefits (for future generations).
Baker Heath Attorney, Ryan Heath, discussed when creating a Living Trust makes sense here.
$10mm - $25mm: If your net worth is between $10mm and $25mm, we generally recommend all of the Foundational documents discussed above, a revocable Living Trust as discussed above, plus the following strategies:
1. Annual Exclusion Gifts: For 2023, you may gift up to $17,000 ($34,000 for a married couple) to an infinite number of people without reducing your Lifetime Gift and Estate Tax Exemption Amount (currently, $12.92mm/person or $25.84mm/married couple). If you are in this net worth band, you should strongly consider making annual gifts to children, grandchildren, and other loved ones to reduce your net worth for estate tax purposes. These gifts can be as simple as outright gifts for birthdays or holidays.
2. Gift Trusts: As an alternative to outright gifts to loved ones, you may decide to make gifts in trust for their benefit. You may setup a gift trust for your loved ones and contribute up to $17,000 for each beneficiary ($34,000 for a married couple). The assets in the gift trust grow free of estate tax and are protected from the beneficiary’s creditors.
These two strategies may be appealing to many of you that want to see your kids or grandkids benefit from your hard work during your lifetime (rather than leaving an inheritance at death). The assets in a gift trust can be used for a broad array of benefits, such as buying a first house, wedding expenses, or college education.
$25mm – $50mm: If your net worth is between $25mm and $50mm, we generally recommend all of the Foundational documents discussed above, a revocable Living Trust as discussed above, annual gifting as discussed above (either outright or in trusts), plus the following irrevocable trusts:
1. Spousal Lifetime Access Trusts (“SLAT”): SLATs are irrevocable trusts created by one spouse for the benefit of the other spouse and ultimately, future generations. The gifting spouse utilizes all or a large portion of the Lifetime Gift and Estate Tax Exemption Amount, but the growth of assets after funding the SLAT passes free of estate tax and is protected from certain creditors.
2. Irrevocable Life Insurance Trusts (“ILIT”): ILITs are irrevocable trusts created to hold life insurance so that the death benefit passes free of both income and estate tax. For those of you that are younger/healthy, owning life insurance within an ILIT is a great way to ensure liquidity for estate tax payments, and also reduce your overall taxable estate.
$50mm+: If your net worth exceeds $50mm, we generally recommend all of the Foundational documents discussed above, a revocable Living Trust as discussed above, and Gift Trusts, SLATs, and ILITs (all discussed above), plus the following documents:
1. Family Limited Partnerships (“FLP”): FLPs are beneficial for those of you in this band. FLPs can help address (i) proper management of assets, (ii) asset protection, and (iii) consolidation of assets into a single entity. An additional benefit of FLPs is that ownership interests may receive valuation discounts for lack of marketability and/or control, which allows you to maximize the gifting strategies with SLATs, ILITs, and Gift Trusts discussed above. FLPs are typically formed to own your real estate, business interests, brokerage accounts, private equity investments, etc. FLPs are extremely beneficial if you own a large farm/ranch, own equity in multiple businesses, or have concerns about management of the family assets after your death or incapacity.
2. Grantor Retained Annuity Trusts (“GRAT”): GRATs may be beneficial to you if you have already used your Lifetime Gift and Estate Tax Exemption Amount, but still want to move future growth of your assets outside of your estate. With a GRAT, you transfer assets to an irrevocable trust, and receive annual annuity payments from the trust for a few years thereafter. You receive the value of your initial contribution back (plus interest), but the growth during the GRAT term passes to a separate irrevocable trust, which is outside of your estate for estate tax purposes.
To account for your unique circumstances, and to see how these recommendations can be specifically tailored to you, please reach out to an experienced estate planning attorney. You can only leave one legacy; let’s make sure yours is protected.
