I fondly recall memories of an extremely wealthy client, a successful businessman and multimillionaire. He was a frugal kind of guy despite his affluence. I remember one time at lunch he was haggling with the waiter over not getting a couple bucks off because a coupon was not being honored.

The point of this anecdote is a tenet that is valuable to many of us: having a significant amount of wealth doesn’t give us any reason to sacrifice our intentionality about what we do with it.

We’ve all heard the horror stories of millionaires who wound up broke. I’m glad to say that in the example I mentioned, through careful estate planning, we were able to set up a family foundation, gift to his children every year within the limit, and navigate whatever life challenges arose.

The important lesson here is that staying wealthy and preserving the quality of life you want is something that must be worked for and in some cases even fought for. This month we’re going to talk about ultrawealthy families and managing estate tax.

What is estate tax?

If you have a large estate, it’s important to understand the taxes you will be subject to, and the strategies that could be potentially used to minimize them.

Let’s start with by answering a foundational question. What is the estate tax?

Here is what the IRS says about estate tax. Anytime you give assets away, you may owe taxes. Your estate’s market value is computed and certain deductions are applied, to arrive at your “net estate.” The lifetime value of any gifts since 1977 is added in, and then the tax is computed off that number.

The estate tax is then reduced by what is called the “unified credit” or “estate credit exemption.”

2023 changes in estate tax credit

The estate credit exemption is $12,060,000 per person in 2022, and will grow by over 7% to $12,920,000 per person in 2023. At a minimum, wealthy families with a net worth greater than $50 million or more should utilize this exemption ($24-$26 million per couple) to segregate the assets on their balance sheet with the highest capacity for future growth.

This can be done in addition to annual gifts ($16,000 per person) and does not trigger a gift tax. If there is potential for discounted valuations due to illiquidity an/or minority interests/control, this exemption can be leveraged even further.

2026 Deadline

The goal is to remove any future growth of the segregated assets from federal estate tax, which is currently at a 40% rate, and to do so before current law “sunsets” in 2026 with the exemption reduced by 50%.

Any future changes to their estate credit exemption amount should not have any bearing on a previous gift, so by acting now you’re taking advantage of the larger (and growing) amount that may very well be substantially less in three more years.

Revisit your estate plan annually!

One of the kindest tricks our minds play on us (pretty reliably) is to keep our looming mortality at a polite distance from our daily life.

Remaining vigilant around estate planning choices, including the choice to not update old documents, or not face the challenge of dealing with not-so-similar heirs and their circumstances, should be a conscious decision rather than one made out of benign neglect. The explosion of risk associated with cognitive impairment makes it imperative that you update your estate wishes with intention.

I recommend clients (both spouses if married) take one hour once a year and simply re-read their existing documents in order to ask themselves – does what these say still represent how I feel about my estate if I/we died tomorrow?

As always, please call or set up a time to speak if any questions.

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