Three Key Tax-Reduction Strategies of the Ultra-Wealthy, Including Estate Planning Techniques
While death and taxes are unavoidable, a significant tax burden for your heirs is not.
The affluent have perfected the art of tax avoidance and ensuring their wealth transfers smoothly to the next generation. However, the strategies they use – to speed up inheritances and keep money away from the government – can also be effective for individuals with much smaller estates.
“It’s a strategic game of chess played over decades,” explains Mark Bosler, an estate planning attorney in Troy, Michigan, and legal adviser to Real Estate Bees. “While the average person relies on a simple will, the well-to-do utilize a different playbook.”
Consider a trust
First, it’s important to understand the facts: Contrary to common belief, typically only the largest estates in America face federal taxes. Currently, estates exceeding $15 million usually incur taxes. Separately, 16 states and the District of Columbia impose their own estate or inheritance taxes, according to the Tax Foundation, often with exemptions lower than the federal level, yet still aimed at millionaires.
Although most individuals can bequeath their assets without their heirs facing heavy taxes, avoiding probate—a process that can delay estate distribution for years and result in substantial court and legal fees—often requires careful planning.
A trust is a fundamental tool in many estate plans.
Even though trusts are often associated with the extremely wealthy, they are actually straightforward instruments suitable for many. Setting one up involves expense, frequently costing thousands in legal fees. But for a retired couple with a home that’s paid off, retirement accounts, and an investment portfolio, a trust can simplify the transfer of assets to beneficiaries.
A key reason is that even if your estate isn’t large enough to be taxed, it can become entangled in probate court, where fees are usually calculated as a percentage of the estate’s total value.
“You are leaving what might have gone to your children or other loved ones to attorneys and the courts,” states Renee Fry, CEO of Gentreo, an online estate planner based in Quincy, Massachusetts. “Anywhere from 3 to 8% of an estate might be lost.”
Trusts enable an estate to bypass the court system entirely and maintain privacy by keeping details out of public records. Some also use them to safeguard savings for potential future nursing home care, aiming to qualify for Medicaid coverage rather than paying out-of-pocket.
Pass on stocks virtually tax-free
Consider being an investor in a high-flying stock that has dramatically increased in value. Now, imagine being able to sell those shares and keep the entire profit, tax-free.
This is possible with one condition: You must pass away.
This situation, known as a “step-up in basis,” enables wealthy families to expand their fortunes while guaranteeing their heirs will not be stuck with a large tax bill.
Here is how it works: Imagine your astute uncle purchased 100 shares of Nvidia at its initial public offering in 1999 for $12 per share. Accounting for stock splits and price appreciation, that initial $1,200 investment could be worth over $9 million today. If he bequeathed it to you, you could sell the shares with little or no tax obligation because the capital gains are calculated from the value on the date of his death, not the original purchase price.
Benjamin Trujillo, a partner with the St. Louis, Missouri-based wealth advisory firm Moneta, describes it as seeming “like a magic trick.” And it is entirely legal.
“Wealth transfer looks like smoke and mirrors,” Trujillo says. “Assets like stocks can quietly grow for decades and, when they’re inherited, the tax bill often disappears.”
While lawmakers have occasionally suggested curbing the “step-up” rule, it remains in effect for now, serving as a major strategy for those building generational wealth. The “step-up” provision also applies to other investments beyond stocks, such as art, real estate, and collectibles.
Keep up to date on beneficiaries
Have you ever been prompted by a financial institution to designate a beneficiary? This is more than just a perplexing or irritating reminder. Estate planners identify it as one of the simplest methods to facilitate the transfer of assets to family members after death.
Rules differ by jurisdiction, but numerous banks and brokerages permit you to name a beneficiary who will directly receive the funds upon your death.
“One of the easiest ways to transfer assets hassle-free,” notes Allison Harrison, an estate planning attorney in Columbus, Ohio.
Because beneficiary designations usually take precedence over wills, it is crucial to keep them current to prevent complications, such as an ex-spouse unintentionally receiving your entire savings.
All these strategies necessitate forethought, but experts agree that dedicating time to plan your estate is a key practice that distinguishes the wealthy.
“Wealthy families plan,” says Fry. “They don’t leave assets and decisions unprotected.”