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Wealth comes from many different places. Perhaps you founded your own thriving business, received an inheritance, or made smart investments over the years that reaped a major profit.

All high net worth families have unique situations, but the common thread between them is the need for professional financial advice, with a particular focus on tax strategies.

Crafting a comprehensive plan can lessen the burden of taxes on both you and your loved ones. Let’s take a look at a few strategies that can make a positive impact on your finances during your lifetime, and even after your death:

1. Trusts

Trusts are another effective method to defer taxes for high net worth families. For instance, when transferring property between spouses to specific types of trusts, the taxes owed are postponed. The tax on any gains that have accumulated on the property will not have to be paid until the property is actually sold, or upon the death of the surviving spouse.

Remember that in this situation, the higher net worth spouse can retain control and decision-making over the property in the trust, as long as broad attribution rules don’t apply. For instance, he or she can create a fixed or flexible method of distribution that will stay in place long after the trust is formed.

Also keep in mind there is usually a 21-year rule in which which taxes will be owned on any accrued gains or losses in the trust at this point after its foundation.

2. Wills

Having an updated will is important on many different levels—mainly to give you control over how your wealth will be distributed to other family members when you die.

It’s important you are also aware of the strategies you can employ with your will to reduce probate taxes. Probate is a legal proceeding where your will is validated by the courts, and the taxes behind it are usually based on a percentage of your estate value.

One way to address this issue is to transfer assets, such as your home, to a trust as stated in the below tax strategy. It may be beneficial to use several different trusts for various types of assets, thus protecting them from the probate tax net. A trust established under a will is considered a testamentary trust and will be taxed in a more favorable way than a traditional.

If you have several children or other beneficiaries, you may want to establish multiple testamentary sub-trusts in order to achieve the ultimate tax savings after death. Again, a tax professional can help assess your individual situation.

3. Insurance

If you have a strategically-planned insurance strategy in place, your beneficiaries may not feel the burden of significant taxes after your death.

For example, if you own annuity contracts through your life insurance policy, your family will be provided with the necessary liquidity for taxes at the right time.

If your insurance policy is owned by a corporation, the taxes on its payout will be owned when you pass away. But most of this death benefit is added to a surplus account, called “capital dividend account,” which can be distributed to shareholders on a tax-free basis.

Finally, if your beneficiaries use your life insurance benefit to buy redeem or buy back shares held by your estate, it can be used toward taxes owed upon your death and can also reduce the total amount of taxes owed.

4. Salaries and dividends

If you own a company that is operated through a corporation, you may be eligible to pay dividends on shares held by, or for the benefit of, low-tax-rate family members. In this situation, shareholders aren’t required to provide services to your company to receive dividends. But remember: attribution rules come into play if the shareholders don’t buy their own shares or purchase them from an arm’s-length lender.

If you choose this method, your company will receive a refund on a portion of the tax it paid on the investment income. If your company’s dividends are received by shareholders with little or no other income, they may not required to pay any tax on the receipt of the dividends. This will obviously substantially reduce the tax rate on the investment income earned by your company.

5. Income Splitting

Income splitting is a tax-planning technique designed to attribute earned income from one individual with a high tax rate to another lower-taxed family member. By “splitting” away the income of the higher earner, his/her income tax will be reduced as a result. This strategy is commonly used when one spouse makes significantly more money than the other.

Be careful, however, as there are several legislative provisions and attribution rules designed to prevent this tax savings method. One way around such restrictions is by giving a prescribed-rate loan to a lower-taxed family member, or to a trust that will be distributed among several family members. That way, income on the invested proceeds will be taxed at the lower tax rate applicable to the borrower.

Make sure to consult a tax professional before income splitting. He or she can assess your personal situation and advise you on which income-splitting strategies best fit your circumstances.

A tax professional can also help ensure that splitting your income won’t affect the eligibility of your lower-income family members to receive other income-tested benefits.

Take away: It’s important to regularly review your estate plan and discuss tax-savings options with a financial professional, as each situation is different. Having a conversation about it now could make for a better financial future for your loved ones.


Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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