For affluent families, tax planning is not just about complying with the law. It is also a critical component of wealth management and wealth preservation.
Put another way, if a family engages in tax planning and effectively mitigates tax liabilities in the process, the implication is that there will be more wealth available to invest, grow, donate and transfer to future generations and causes.
It would be wonderful to say that tax laws are simple, straightforward and predictable. But as every reader knows, tax laws have none of these qualities.
In fact, tax laws are precisely the opposite—complex, difficult to navigate and ever-changing.
The 2017 Tax Cuts and Jobs Act, for instance, has provisions that are set to expire at the end of 2025. Nearly all individual income tax rates are poised to go up, the standard deduction could fall by 50% and increased exemption amounts associated with the Alternative Minimum Tax (AMT) will revert to levels that predate the law.
And, perhaps most critically for affluent families, the estate and gift tax exemption is set to fall from $13.61 million per person in 2024 to $7.15 million per person at the end of 2025.
This looming change underscores the importance of tax mitigation within the broader framework of estate planning. Affluent families must consider how to structure their wealth to minimize the impact of potential tax increases while adhering to legal guidelines. Instruments like dynasty trusts, life insurance policies, family limited partnerships, grantor retained annuity trusts and charitable remainder trusts can play pivotal roles in a comprehensive estate plan.
Each of these tools serves specific purposes:
- Dynasty trusts provide for generations without direct transfer of assets, sidestepping estate taxes for an extended period.
- Life insurance policies can be structured to pay out estate taxes, thus preserving the value of the estate for the heirs.
- Family limited partnerships allow for the management and control of family assets while offering tax advantages through valuation discounts.
- A Grantor Retained Annuity Trust (GRAT) is a financial instrument where the grantor places assets into a trust and receives an annuity payment for a set period, after which the remaining assets pass to the beneficiaries, potentially reducing estate taxes.
- A Charitable Remainder Trust (CRT) is a type of trust in which the grantor receives income from the trust for a lifetime or specified term, and the remainder of the trust’s assets then go to a designated charity, offering tax benefits to the grantor.
There is a mountain of rules and provisions to keep track of, which is where financial advisors and tax planners—preferably working together—come into play. In partnership with a family’s tax advisor, financial planners can help families make sense of the intricate tax landscape while introducing strategies to mitigate tax liabilities, such as tax-efficient investments, the use of trusts, tax-loss harvesting and charitable giving.
An interesting feature of tax planning for affluent families is that short-term and long-term considerations are often happening at once. A family may have a thorough, long-term estate planning strategy that involves a grantor retained annuity trust (GRAT) and charitable remainder trusts (CRT). But in any given year, the family may also need advice on itemized deductions, the timing of the sale of an investment or help navigating which deductions and exemptions are permissible to avoid triggering the AMT.
For families with international interests, the tax implications become even more complex. Disclosure requirements, foreign tax credits and the potential for double taxation are just a few of the considerations that must be managed carefully. In addition, global initiatives like the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA) require wealthy families to be vigilant about their reporting obligations.
CRS, developed by the OECD, requires participating countries to exchange information on financial accounts held by their residents with other countries. This initiative helps tax authorities track and tax offshore accounts and investments. FATCA, a U.S. regulation, mandates foreign financial institutions to report the financial accounts of U.S. taxpayers to the IRS, affecting U.S. residents, citizens and global financial entities. Non-compliance can lead to stiff financial penalties.
The complex and ever-changing nature of tax laws makes it vital to stay informed and proactively work with skilled tax professionals who can provide tailored strategies that align with current tax laws and your long-term financial goals. Tax planning should be an ongoing exercise, not a transactional one.
At the end of the day, working with a financial planner should bring efficiency and clarity to the tax planning experience, helping your family implement optimal strategies. This partnership allows for a dynamic approach to managing assets, where strategies are continuously refined in response to evolving market conditions and tax regulations. Such proactive management is crucial in identifying opportunities for tax optimization and risk mitigation, further safeguarding your family’s financial legacy.
IMPORTANT DISCLOSURES
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
This presentation includes forward-looking statements and opinions, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and opinions are inherently uncertain, and actual events or results may differ materially from those reflected in the forward-looking statements. In addition, all expressions of opinion are subject to change without notice in reaction to shifting market conditions. Therefore, undue reliance should not be placed on such forward-looking statements and opinions.
The tax and estate planning information offered by Newport Capital Group is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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