High Net Worth Financial Planning: Coordinating Taxes, Income, and Legacy Goals

For families in our area, accumulating significant wealth brings both opportunities and complexities. While a higher net worth provides security, it also introduces sophisticated challenges regarding tax efficiency, income sustainability, and the transfer of wealth to the next generation.

High net worth (HNW) financial planning is not just about investment returns; it is about the intricate coordination of your tax situation, your cash flow needs, and your ultimate legacy.

With that in mind, let’s look at what high net worth planning entails, the strategies for coordinating taxes and income, and how to align these with your legacy goals.

What Is High Net Worth Financial Planning?

High net worth financial planning is a comprehensive approach designed for individuals and families with significant investable assets typically exceeding $1 million to $5 million. Unlike standard planning, which often focuses on accumulation, HNW planning shifts the focus toward preservation, tax mitigation, and distribution.

This process integrates multiple disciplines, including:

• Tax Strategy: Managing liabilities across income, capital gains, and estate taxes.

• Risk Management: Protecting assets from creditors and market volatility.

• Estate Planning: Ensuring wealth is transferred according to your wishes, not the default rules of the state.

Coordinating Taxes and Income

One of the primary benefits of HNW planning is the ability to control when and how you are taxed. For retirees in our specific jurisdiction, this is particularly relevant given the favorable state-level tax treatment of retirement income.

1. Strategic Asset Location

Asset location refers to placing specific investments in the account types that offer the most favorable tax treatment (e.g., placing high-yield bonds in IRAs and tax-efficient index funds in taxable brokerage accounts).

• Possible Advantages:

  • Reduced Tax Drag: By holding tax-inefficient assets in sheltered accounts, you may keep more of your returns each year.

  • Flexibility: Having assets in Taxable, Tax-Deferred (IRA/401k), and Tax-Free (Roth) "buckets" allows you to structure withdrawals to manage your tax bracket in retirement.

• Possible Tradeoffs:

  • Complexity: Managing an allocation across multiple account types requires rigorous rebalancing and monitoring.

  • Liquidity Constraints: Tax-advantaged accounts often have access restrictions or penalties for early withdrawal.

2. The 2026 Estate & Gift Tax Landscape

With the federal estate tax exemption permanently increased to $15 million per person (starting January 1, 2026), the focus for many families has shifted from "estate tax avoidance" to "income tax optimization."

• The Strategy: Since fewer families will owe federal estate tax, the goal is often to maximize the "step-up in basis" at death, potentially eliminating capital gains taxes for heirs.

• The Tradeoff: This requires careful coordination. Gifting assets during your lifetime removes them from your estate, but it also means your heirs lose the step-up in basis they would have received if they inherited the assets at your death.

3. Roth Conversions

For high earners or those with large pre-tax IRA balances, converting funds to a Roth IRA can be a powerful tool.

• Possible Advantages:

  • Tax-Free Growth: Future growth and qualified withdrawals are tax-free, protecting you from potential future tax rate increases.

  • No RMDs: Roth IRAs are not subject to Required Minimum Distributions (RMDs) during the owner's lifetime, offering greater control over taxable income.

• Possible Tradeoffs:

  • Upfront Cost: You must pay income tax on the converted amount in the year of the conversion.

  • Timing Risk: If your tax rate is lower in the future than it is today, paying the tax now via a conversion may result in less total wealth.

Legacy Goals and Estate Planning

Living in our state offers a distinct advantage for legacy planning: There is currently no state-level estate tax. However, federal rules and the probate process remain significant considerations.

1. Utilizing Trusts

Trusts are a cornerstone of high net worth planning, offering control that a simple will cannot.

• Possible Advantages:

  • Probate Avoidance: Assets held in a living trust generally bypass probate, ensuring privacy and faster access for beneficiaries.

  • Control: You can stipulate exactly how and when heirs receive assets (e.g., distributing funds at specific ages or for specific purposes like education).

• Possible Tradeoffs:

  • Cost and Maintenance: Trusts involve legal fees to establish and require ongoing administration to ensure assets are properly titled.

  • Irrevocability: Advanced trusts used for removing assets from a taxable estate generally cannot be changed once established.

2. Charitable Giving Strategies

For those with philanthropic intent, structured giving can provide a dual benefit of supporting causes and reducing tax liability.

• Possible Advantages:

  • Donor-Advised Funds (DAFs): You can take an immediate tax deduction for a contribution but distribute the grants to charities over time.

  • Qualified Charitable Distributions (QCDs): For those over age 70½, giving directly from an IRA can satisfy RMDs without increasing taxable income.

• Possible Tradeoffs:

  • Loss of Access: Once assets are gifted to a DAF or charity, they are no longer yours to spend on personal needs.

How to Approach the Decision

High net worth planning is not a one-time event; it is an ongoing process of alignment. A prudent approach includes:

1. Audit Your Current Estate Plan:

   • Does your will or trust reflect the new $15 million federal exemption limit?

   • Are your beneficiary designations updated on all insurance and retirement accounts?

2. Evaluate Your Tax Exposure:

   • Review your recent tax returns to identify sources of "tax drag."

   • Consider if your current withdrawal strategy is pushing you into unnecessary Medicare surcharge brackets (IRMAA).

3. Coordinate with a Team:

   • High net worth individuals often need a "personal CFO" to coordinate between their CPA, estate attorney, and financial advisor.

   • Ensure all professionals are working from the same playbook regarding your legacy and income goals.

4. Review Local Benefits:

   • Ensure you are maximizing local opportunities, such as the 4% property tax assessment ratio for primary residences and state-specific retirement income deductions.

Important Disclosures

This material is general in nature and for informational purposes only. It does not take into account your specific objectives, financial situation, or needs and does not constitute personalized investment, tax, or legal advice. Tax laws, including estate tax exemptions and state regulations, are subject to change. High net worth planning involves complex legal and tax considerations; you should consult with a qualified attorney and tax professional before implementing any strategy.