Wealth management & taxes: planning for financial prosperity

Navigating complex tax issues for high-net-worth households

Taxes are stressful for everyone, but you have much more to handle than the average household. Here are a few concerns to keep on your wealth management tax planning radar.

• Tax management from multiple income streams:

  Building diverse income streams is a smart strategy but adds complexity to your tax return. Executive compensation like stock options, business income, real estate rental income, and trust income require the right planning to best manage the tax impact.

• Minimizing tax burdens from diverse investment portfolios:

  As you expand your investment portfolio, you must also plan around the taxes for different asset classes and accounts.

• Compliance with laws and regulations:

  Tax laws and regulations constantly change. You have more to keep up with as a high-net-worth individual, especially if you own businesses or property in multiple states. Financial planning regulations also change as you go through different stages of life

• International tax considerations:

  If you own property and investments outside the United States, you must stay compliant and coordinate the tax impact between each country. In this case, it pays to work with an advisor experienced in international tax planning.

• Impact of substantial charitable giving:

  Charitable giving is more than a kind thing to do. It could also significantly lower your ongoing tax burden. Before making substantial gifts, ensure you've planned how to maximize the tax benefit.

• Higher likelihood of tax audits:

  As a high-net-worth individual, you are significantly more likely to face a tax audit. This is even more true now that the IRS has added thousands of new agents to increase audits of high-net-worth taxpayers by 50%.¹

Tax considerations for estate planning

Estate planning allows you to determine how your assets will transfer to the next generation after you pass away. Given your net worth, this is a chance to create a legacy and generational wealth for your loved ones. But first, you need to consider estate taxes as part of your financial plan.

The federal government charges estate taxes on the transfer of property at death. In 2024, you can leave up to $13.61 million² of property without your heirs owing taxes. However, this limit could drop roughly in half by 2026 unless the government takes action to extend current tax rates. That means millions more of your property could be exposed to the estate tax at death, which charges a top rate of 40%.

Even if the high federal exemption is extended, 17 states and the District of Columbia also charge state and inheritance taxes, and many have much lower exemptions. Oregon charges estate taxes starting at $1 million,³ and Massachusetts starts at $2 million.⁴

Tax-efficient strategies

Taking advantage of these wealth management tax strategies now can reduce your tax burden today, as well as the taxes your loved ones will be responsible for on future inherited wealth.

Tax-efficient portfolio management

As you manage your portfolio, consider the tax impact of your investments and keep track of your taxable income for the year. If your income is low enough to keep you in the 15% long-term capital gains bracket, now could be a better time to sell investments versus years when you're in the 20% bracket. In 2024, you're in the 20% bracket if you're single with taxable income over $518,900 or married with joint income over $583,750.⁵

If your investment income will be unusually high for a year, search your portfolio for opportunities to sell for a taxable loss to offset the gains. Make this part of your annual tax preparation routine.

Maximizing retirement plan benefits

Retirement plans like an IRA or 401(k) allow you to defer taxes on investment gains and get a deduction for your contributions. Be sure to maximize.

If you work for a company with a 401(k), you may contribute up to $23,000 annually if you're younger than 50 and $30,500 if you're 50 or older in 2024.⁶ If you own your own business, your contribution limits through a retirement plan may be even higher.

Your workplace retirement plan might include a Roth IRA, which offers tax-free withdrawals of the investment gains during your retirement and when your heirs inherit the account. If you have a pre-tax traditional IRA or 401(k), you can convert them to a Roth. You pay the taxes upfront, but future growth and withdrawals would then be tax-free.

Investment asset location

If you have a mix of retirement and taxable brokerage accounts, consider which investments would be most effective in each. Placing assets with more growth potential in your retirement accounts will defer taxes. You could then use your brokerage accounts for more tax-efficient investments, like index funds or tax-free municipal bonds.

Strategic charitable contributions

Think about when to best use tax deductions for charitable donations. For example, rather than spreading out donations over many years, you might want to make one large donation in a year with an unusually high tax bill, like after selling a business or investment property. Consider a donor-advised fund if you don't want to give away all the money at once. This allows you to deduct the contribution immediately, but then you can take your time to give the money to charity.

Moving your primary residence

Moving solely for tax purposes may sound extreme, but it may make sense to relocate if you live in a state with estate and inheritance taxes. Also, some people choose to leave a state with high-income tax to one with none, like Florida, Nevada, Texas, or Washington.

Gifting property

You don't have to wait until you pass away to transfer wealth to your family. In 2024, you can give up to $18,000 per person without tax consequences.⁷ If you give more, it cuts into your estate tax exemption at death. Still, this could make sense for some.

Before you pass, you might also consider giving your heirs property you think will grow in value, which will reduce the size of your taxable estate. In addition, if you're worried about the lifetime exclusion potentially being cut in half by 2026, you can give away up to the much higher limit now.

Leveraging trust funds

Trust funds are another way to transfer property to your heirs. With an irrevocable trust, you can transfer property out of your estate, the same as gifting. But in exchange, you have more control over when your heirs receive the property. For example, the trust might only pay out a percentage yearly rather than everything at once.

Other trusts give you some benefit while alive. A qualified personal residence trust allows you stay in your home up until a specified date even though you gave it away to the trust. A spousal lifetime access trust (SLAT) allows you to transfer property out of your estate for younger family members while still allowing your spouse to access the money and property while they're alive.

Invest in wealth management tax planning

Wealth management tax planning strategies can be highly effective in saving you money, but they take time, training, and experience to implement. Working with an experienced team of accountants, financial advisors, and estate planning attorneys will help you determine which financial moves make the most sense for you.

A wealth management team can:

• Set up an individualized plan, including the proper accounts and trust funds
• Manage your investments and other assets in the most tax-effective way possible
• Stay on top of the latest regulations and changes, especially tax legislation

Given your net worth, it's not unreasonable to think that the right team and tax planning strategies could reduce your tax bill by hundreds of thousands, if not more. That's why wealth management tax planning is an investment in itself and a highly profitable one at that.

For additional guidance on strategies for your wealth transfer, contact an advisor from Citizens Private Wealth.