Advanced Estate Planning Tax Strategies: A Guide for High-Net-Worth Individuals

This material is for informational purposes only and is not intended to provide investment, tax, or legal advice. Individuals should consult their professional advisors before making any financial decisions.

For high-net-worth individuals and families, effective wealth transfer is about more than passing on assets. It often involves preserving a legacy while navigating a complex tax environment. Standard estate planning tools may not be sufficient for larger estates or more intricate family situations. In these cases, exploring advanced estate planning tax strategies can be an important part of a comprehensive plan.

Because these techniques are complex and highly individualized, they require careful analysis of your financial picture, family dynamics, and objectives. The strategies below provide a general overview of several approaches that may be considered in collaboration with tax and legal professionals.

Grantor Retained Annuity Trusts (GRATs)

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust sometimes used to transfer potential future appreciation of assets to beneficiaries in a tax-efficient manner. The grantor contributes assets to the trust and receives a fixed annuity payment for a set number of years.

At the end of the trust term, any remaining assets are distributed to the beneficiaries named in the trust agreement. The potential effectiveness of this strategy is often tied to whether the assets in the trust grow at a rate higher than the IRS-mandated interest rate (the Section 7520 rate) assumed when the GRAT is created.

Implementation Considerations

• Asset Selection: Assets with meaningful long-term growth potential, such as closely held business interests or concentrated equity positions, are often evaluated for use in a GRAT.

• Term Length: The length of the GRAT term is an important decision. A longer term may allow for additional appreciation but also increases the likelihood that the grantor does not outlive the term, which can affect the strategy’s outcome.

• “Zeroed-Out” GRATs: Some GRATs are structured so the present value of the annuity payments is designed to closely approximate the value of the assets transferred, thereby mitigating the taxable gift for transfer tax purposes. Whether this approach is appropriate depends on individual circumstances and current regulations.

Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs)

For individuals with charitable goals, certain trust structures can help support philanthropy while also addressing estate and income tax considerations. Two common structures are Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs).

• Charitable Lead Trust (CLT): A CLT makes payments to a designated charity for a defined period. At the end of the term, the remaining assets pass to non-charitable beneficiaries, such as family members. Depending on how it is structured, a CLT may help reduce the taxable value of assets transferred to heirs.

• Charitable Remainder Trust (CRT): A CRT reverses this sequence. It provides an income stream to one or more non-charitable beneficiaries (often the grantor or family members) for a set term or lifetime. At the end of the term, the remaining trust assets are distributed to one or more charities. CRTs may provide an income tax deduction in the year the trust is funded, subject to various limitations.

Implementation Considerations

• Income Stream vs. Legacy: A CLT may be more appropriate for those emphasizing a charitable “lead” benefit with a remainder passing to heirs, while a CRT may better suit individuals who wish to receive or provide income first, with the remainder ultimately benefiting charity.

• Tax Implications: Each trust type has its own set of income, gift, and estate tax considerations. Modeling the potential impact with qualified tax and legal professionals is essential.

• Trustee Selection: The trustee plays a critical role in administering the trust according to its terms and applicable law. Many families consider appointing an institutional or independent trustee to provide oversight and continuity.

Irrevocable Life Insurance Trusts (ILITs)

Life insurance is often used in estate planning to provide liquidity for estate taxes, debts, or other obligations. However, if the insured owns the policy directly, the death benefit may be includable in their taxable estate under current law.

An Irrevocable Life Insurance Trust (ILIT) is a trust established to own a life insurance policy. When properly structured and administered, the ILIT can keep the policy’s death benefit outside of the insured’s taxable estate. The trust’s proceeds can then be used, at the trustee’s discretion and subject to the trust terms, to provide liquidity or benefit heirs.

Implementation Considerations

• Funding the Trust: The grantor generally makes gifts to the ILIT to cover policy premiums. These gifts are often structured with withdrawal rights (commonly referred to as “Crummey powers”) so they may qualify for the annual gift tax exclusion.

• Three-Year Look-Back Rule: If an existing policy is transferred to an ILIT, the insured typically must survive for three years after the transfer for the proceeds to be excluded from the insured’s estate under current rules. This requirement does not apply to new policies acquired directly by the ILIT.

• Trustee Independence: To help support the intended tax treatment, the grantor generally should not serve as trustee. Selecting an independent trustee can help avoid potential estate inclusion issues.

Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs)

Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) are entities sometimes used to organize and manage family assets—such as investments, real estate, or business interests—within a single structure. They may also be used to facilitate gradual wealth transfers across generations.

Typically, senior family members serve as general partners or managing members and retain control over management decisions. They can then transfer non-controlling interests (limited partnership or non-managing member interests) to other family members. Under certain circumstances, these interests may be valued for transfer tax purposes at a discount due to lack of control and lack of marketability, subject to IRS scrutiny and professional valuation.

Implementation Considerations

• Legitimate Business Purpose: To be respected for tax purposes, an FLP or FLLC should have a bona fide non-tax purpose, such as centralized management, liability protection, or administrative efficiency.

• Valuation: Utilizing a qualified appraiser to determine the fair market value of transferred interests is critical, particularly when applying valuation discounts.

• Operational Formalities: The entity should be operated as a separate business, with its own accounts, records, and governance practices. Failure to maintain formalities can undermine the structure’s effectiveness.

Navigating Your Estate Planning Journey

Advanced estate planning tax strategies can offer meaningful benefits, but they are not one-size-fits-all solutions. Each technique has specific requirements, advantages, limitations, and risks. The right combination, if any, depends on your asset mix, family goals, time horizon, and tolerance for complexity.

The most effective plans are often those that are integrated across disciplines—combining estate planning, tax planning, investment management, and family governance. Working with a coordinated team of financial, legal, and tax professionals is essential to evaluating which strategies may be suitable, implementing them correctly, and revisiting them as laws and family circumstances evolve.

Ultimately, advanced estate planning is about more than tax efficiency. It is about aligning your financial resources with the legacy you wish to create for future generations and the causes that matter most to you.

---

Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd and Parkview Partners Capital Management are separate entities. Advisory services are offered through Stratos Wealth Partners, Ltd. Investing involves risk, including possible loss of principal. Neither Stratos nor Parkview Partners Capital Management provides legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. Tax laws are subject to change and may have different impacts based on individual circumstances. Past performance is not indicative of future results. For more information, please review our Form ADV, available upon request.