If you are a high-net-worth individual in California, you must strategize on how to preserve your assets with optimal tax advantage outcomes for you and your loved ones. Here’s a short guide on how to do so.
Start by establishing a trust
A trust is a legal arrangement where one person (the trustee) holds property or assets for another person (the beneficiary). You can use a trust to protect your assets and provide for your loved ones after you die. There are many different trusts, each with its specific purpose. For example, there’s a special needs trust for disabled heirs, a generation-skipping trust for your grandchildren, and a spousal lifetime access trust for your partner, among others.
Gifts parts of your estate to your loved ones when still alive
You can give gifts to your heirs up to a certain amount each year without incurring any taxes. For 2022, the annual gift tax exclusion is $16,000 ($32,000 for couples) per person. This means that you can give up to $16,000 (or $32,000 for couples) to each of your loved ones without paying any tax.
Plan for incapacity by creating Advance Directives
Advance directives are legal estate planning documents that allow you to designate someone to make decisions on your behalf if you become incapacitated. The two most common types of advance directives are durable powers of attorney and living wills.
A durable power of attorney allows you to appoint someone to manage your finances and make other decisions on your behalf if you become incapacitated. On the other hand, a living will enable you to express your wishes regarding medical treatment if you become unable to communicate those wishes yourself.
It is important to note that California has its unique estate planning laws. For example, the state doesn’t charge estate taxes when passing your assets to your loved ones when you die. However, the federal government will tax you if your estate is worth $12.06 million or more.