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As a wealth manager serving highly affluent individuals and families with large and multifaceted estates, I must navigate a complex web of tax structures daily to ensure that my clients keep more of their hard-earned money. Tax dynamics are fluid, shifting alongside evolving policy priorities. While it’s important to remain adaptable as tax law readily dips one way or another, proactivity is always the best measure.
True tax efficiency is not about finding one silver bullet but thinking holistically about someone’s unique situation. I have identified a few opportunities within my portfolio and wealth management practice that prompt consideration for your own strategies as you plan for large estates.
How effectively are you using location?
Tax situations vary by state. Shifting the location for a situs is not always an option for every wealth management company, and it's not always an option for even wealthy individuals and families. However, taking advantage of varying state laws can offer greater flexibility, optimal tax savings and better protection
In Nevada, clients can take advantage of no state income tax on individuals, business entities, or trusts, no state transfer taxes, and no inheritance taxes. There is protection from federal or state transfer tax or state income tax for dynasty trusts through a perpetuity period of 365 years. States like Texas and Wyoming offer many of the same benefits, and states like New Hampshire and Louisiana (as well as many others) offer at least one.
If you’re looking to expand your wealth management, and you can do so, opening a new office in a nearby state could be the perfect marriage between finding better tax strategies and better molding your practice to the clientele your company has evolved to serve. Moving a situs to reflect more location-oriented solutions could very well prove advantageous for your clients’ specific situations.
How early are your clients planning for transition?
There is no shortage of examples of clients waiting until the last minute to plan the transfer of their wealth and finding some repercussion for their procrastination. As advisors dealing with estates passed down across multiple generations, I have seen the importance of putting a plan in place as early as possible to take the fullest advantage of established tax law, to remain adaptable for any future changes to tax law, and to be prepared for the unexpected, which will most certainly affect the tax situations of beneficiaries and their families.
Planning early will help your clients take greater advantage of gift tax exemptions in particular. The annual gift tax exclusion amount is high and has increased since 2021, and the lifetime gift and estate tax exclusion per person amount has climbed to a record peak. This recommendation is time sensitive as the gift-tax exemption is high due to inflation, and these laws are set to sunset at the end of 2025. New laws are not expected to be as favorable.
Regardless of the per-year amounts given to beneficiaries, whatever is not used during a person’s life is available for use at death on the estate tax return. Crucial to bear in mind, with gift tax exemptions, siblings and spouses are considered separate entities both as beneficiaries and benefactors. However, gifts that go above and beyond the per-person, per-year amount (except for direct payments for tuition or medical expenses) reduce a donor’s lifetime exemption amount. By taking full advantage of the per-year exemptions, your clients could keep more money in the family when they transfer ownership and responsibility of the estate.
Lifetime gifts also carry the donor’s tax basis. Gifting assets that have already appreciated will act as capital gain. If a client wants to maximize assets going towards their family or legacy, stocks and mutual funds that have already appreciated are better used for a philanthropic cause. Charities can sell assets without paying a capital gains tax, and taxpayers may deduct the market value of the asset on the date gifted.
The biggest mistake people make with tax-efficiency is trying to do it alone. Errors when working with large sums can prove to be quite costly. Individuals and their families whose assets require sophisticated planning should always involve outside counsel. Seeking comprehensive tax-solutions is always best practice, and even estate planning attorneys, accountants, or financial advisors, should never overreach their area of expertise.
Tim McCarthy is a managing director of Whittier Trust
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
