How Entrepreneurs And Investors Can Protect Their Assets, Reduce Taxes, And Preserve Wealth With Wills, Trusts, And Foundations

Estate planning is the process of arranging for the management and transfer of a person's assets and wealth before and after their death through the use of wills, trusts, and foundations, in additional to other legal instruments.

There is more to estate planning than setting up a will and revocable trust and shelving it till a future date or event (death or incapacitation). It is an intricate art that demands a comprehensive understanding of asset protection, tax reduction strategies, and wealth management principles, especially if you have multiple assets or a successful business that could be passed on to your heirs.

As Estate and Tax Lawyers involved in this industry for nearly two decades, we've witnessed the profound impact a meticulously crafted estate plan can have on preserving and transferring wealth across generations. 

This article will explore three pillars of effective estate planning, namely, asset protection, tax reduction, and wealth management, providing insights into the intertwined strategies and techniques that can safeguard one's business, personal, and philanthropic legacy.

Pillar One Is Asset Protection: The Foundation of Estate Planning:

Identifying and protecting assets is the bedrock of any successful estate plan. The process begins with a thorough inventory of an individual's estate, encompassing business assets, personal assets, and identifying any potential liabilities. This crucial step ensures that no aspect of one's wealth is overlooked or left vulnerable.

Once the estate's composition is clearly defined, the focus shifts to assessing potential risks from external and internal parties.

1. External threats may arise from vendors, clients, creditors, investors, business partners, government agencies, family members, or even future generations.

2. Internal risks, on the other hand, can stem from mismanagement or disputes within the estate or among co-trustees themselves.

To mitigate these risks, estate planning professionals can generally employ a range of asset protection strategies, such as:

1. Trusts, limited liability companies (LLCs), and specialized asset protection vehicles which can shield assets from creditors and lawsuits.

2. Additionally, prenuptial agreements, donations to foundations, or gifts to irrevocable trusts, coupled with proper entity structuring can insulate assets from potential family disputes or claims from future generations.

Pillar Two Is Tax Reduction: Preserving Wealth Through Strategic Tax Planning:

Minimizing tax liabilities is a critical component of estate planning, as failing to do so can significantly erode the value of one's estate. There are three layers of tax strategies that we generally look at when assessing the tax burden entrepreneurs and investors might face while they are alive and after their death.

These are:

1. Federal Income and Capital Gains Tax:

2. Income and capital gains taxes can be reduced by leveraging itemized deductions, charitable donations to a private foundation, and gifting strategies tailored to each client's unique circumstances.

3. Federal Estate & Gift Tax:

4. The federal estate and gift tax presents another challenge that requires careful consideration, especially in light of the upcoming changes in 2026 (sunsetting of the Tax Cuts & Jobs Act). Techniques such as leveraging the increased lifetime gifting limits to gift to individuals, or gifting to sophisticated irrevocable trusts, such as Grantor-retained annuity trusts (GRATs) or Indentially Defective Grantor Trust (IDGT) can help minimize the impact of these taxes.

5. Probate Fees & Inheritance Tax:

6. Additionally, proper planning for state-level probate proceedings and inheritance taxes can ensure that assets are transferred seamlessly to beneficiaries without unnecessary taxation or delays.

It's worth noting that tax laws are constantly evolving, and staying abreast of these changes by pivoting, amending, or altering your strategies, where possible to do so, is the key to lowering taxes and retain more of your wealth, generation after generation.

Pillar Three Is Wealth Management and Transfer: Estate Restructuring

The final pillar of estate planning revolves around the strategic distribution and management of assets, where an individual's wishes and values truly come into play. This is the stage where decisions are made regarding how wealth should be managed during your life, and how they should be transferred after your death.

1. Transferred Through Your Estate:

2. Wills and revocable trusts are common tools that allow individuals to maintain control over their assets during their lifetime while ensuring they are distributed according to their wishes after passing. 

3. Transferred Out Of Your Estate (Completed Gift):

4. Alternatively, individuals may choose to "gift" their wealth directly to another individual during their lifetime, or make a gift to an irrevocable trust, managed by an independent trustee, to remove those assets from the person's estate. 

5. Controlled by the Foundation's Board Members:

6. The third option is to leverage the benefits offered by a private foundation, where donated cash or assets are removed from the person's estate, are not subject to federal estate or gift tax limits and rules, and are controlled by board members, who are generally family members.

For a detailed guide on how private foundations can be leveraged, please refer to the article titled:

How Business Owners & Entrepreneurs Can Transform Into Purpose-Driven Philanthropists By Incorporating A Private Foundation. 

3 Practical Tips To Leverage These Strategies: 

These structures offer various benefits, such as asset protection, tax minimization, and the ability to impose specific conditions or guidelines for the management and distribution of wealth.

Tip 1: Encourage your estate planning professionals to work closely with their clients, as well as other professionals like financial advisors and accountants. This collaborative approach ensures that each estate plan is tailored to the client's unique circumstances and goals, and that it remains up-to-date as their life and the legal landscape evolve.

Tip 2: The art of estate planning is a multifaceted endeavor that demands a nuanced understanding of asset protection, tax reduction strategies, and wealth management principles. By working with experienced estate and tax lawyers, individuals can navigate these complex areas with confidence, safeguarding their legacy and ensuring that their wishes are carried out according to their values and priorities.

Tip 3: Understand how the tax code is written

Embracing the art of estate planning is a proactive step towards securing a lasting legacy for generations to come. With the guidance of skilled professionals, individuals can find peace of mind knowing that their hard-earned wealth will be protected, preserved, and distributed in accordance with their intentions, leaving an indelible mark on the lives of their loved ones and the causes they hold dear.

ATTEND A FREE WORKSHOP:

We invite you to attend a free workshop where we discuss the above strategies in more depth and provide you with an opportunity to speak with our attorneys and tax professionals who operate in the world of foundations, day-in and day-out.