Contributed by: Tom Kelley, MBA
Estate planning is a critical element of wealth management, particularly for individuals and families aiming to preserve and transfer wealth across generations. Selecting the right investment options plays a pivotal role in supporting the preservation of financial legacies while mitigating tax liabilities and legal complexities.
When aligned with a comprehensive estate plan, thoughtfully chosen investments can provide income for loved ones, shield assets from unnecessary taxation, and even establish philanthropic legacies. Here, we explore some considerations for making informed investment decisions tailored to estate planning goals.
Considerations for Estate Planning Investments
Effective estate planning extends beyond naming heirs or drafting wills. It encompasses strategic decisions about how investments are structured, taxed, and distributed. Several factors should guide these choices:
- Tax Efficiency
Taxes, including estate taxes, capital gains taxes, and income taxes, can significantly erode the value of inherited investments. Strategies that mitigate tax exposure are essential for preserving wealth. - Liquidity Needs
Estates often face immediate costs such as taxes, legal fees, or the financial needs of heirs. Ensuring that the estate has sufficient liquid assets helps prevent forced sales of less liquid investments like real estate or private equity. - Investment Horizon and Risk Tolerance
The age and financial goals of heirs influence the suitability of investment types. Younger beneficiaries with longer investment horizons may benefit from growth-oriented assets, while older heirs may prioritize income-generating or stable investments. - Alignment With Personal Values
Increasingly, families are interested in investments that reflect their values, such as socially responsible or philanthropic-focused investment options. A trusted advisor can give options to help incorporate unique values into a lasting legacy.
Investment Options Tailored for Estate Planning
Tax-Advantaged Accounts
Accounts like Roth IRAs and 529s offer significant estate planning advantages.
- Roth IRAs: Assets grow tax-free, and distributions are also tax-free for heirs. These accounts can serve as powerful vehicles for passing down wealth without the burden of future income taxes.
- 529 Plans: For families focused on funding education, 529 accounts allow for tax-free growth and distributions when used for qualified expenses. These accounts can be used as part of a larger estate planning strategy.
Life Insurance in Estate Planning
Life insurance often serves as a cornerstone of estate planning, offering a combination of flexibility, liquidity, and tax efficiency. Its unique characteristics make it a versatile tool for preserving wealth, meeting the financial needs of heirs, and ensuring the seamless transfer of assets. Whether used to provide immediate liquidity, equalize inheritances, or mitigate estate tax burdens, life insurance can complement a broader investment strategy.
Key Benefits of Life Insurance in Estate Planning
- Liquidity Without Asset Liquidation
One of the most significant challenges in estate planning is having sufficient liquidity to cover expenses such as estate taxes, probate costs, and outstanding debts. Life insurance proceeds are typically paid directly to beneficiaries, bypassing the probate process and providing immediate funds. This can help prevent the need for heirs to sell other assets, such as real estate or business interests, which may take time or result in a loss of value. - Tax-Free Proceeds
Death benefits from life insurance policies are generally income-tax-free to beneficiaries, making them a highly efficient way to transfer wealth. With proper planning, such as using an irrevocable life insurance trust (ILIT), life insurance can also be structured to exclude the proceeds from the taxable estate, further reducing estate tax exposure. - Estate Equalization
For families with complex estates, particularly those including illiquid or unique assets like family businesses or real estate, life insurance can help equalize inheritances among heirs. For example, if one child inherits a business and another does not, a life insurance policy can help provide a comparable share of the estate’s value. - Wealth Replacement
Families with philanthropic goals may use life insurance to replace wealth donated to charity. This strategy gives the opportunity for heirs to still receive their intended inheritance while the family supports causes they value. - Long-Term Care and Living Benefits
Many modern life insurance policies, such as hybrid policies, include riders for long-term care or chronic illness. These benefits can provide policyholders with financial resources to cover healthcare expenses, preserving other estate assets for heirs.
Types of Life Insurance for Estate Planning
Choosing the right type of life insurance depends on individual circumstances, estate size, and long-term goals.
1. Term Life Insurance
- Suitable For: Temporary needs, such as income replacement for young families or debt coverage.
- While term policies provide affordable coverage for a specific period, they may not be ideal for long-term estate planning goals, as they lack the permanence and cash value features of other types.
2. Whole Life Insurance
- Suitable For: Long-term wealth transfer and estate liquidity.
- Whole life policies offer lifelong coverage with a guaranteed death benefit and cash value accumulation. These policies can serve as both a wealth-building and wealth-transfer tool.
3. Universal Life Insurance
- Suitable For: Flexibility and estate tax planning.
- Universal life policies allow adjustments to premiums and death benefits, providing a tailored solution for evolving estate planning needs. Indexed universal life (IUL) and guaranteed universal life (GUL) policies are popular options for high-net-worth families.
4. Second-to-Die (Survivorship) Life Insurance
- Suitable For: Estate tax planning for couples.
- This type of policy covers two individuals (typically spouses) and pays out after the second death. It is particularly effective for covering estate taxes or leaving a legacy for heirs.
Leveraging Irrevocable Life Insurance Trusts (ILITs)
An ILIT is a specialized trust designed to hold life insurance policies. By transferring ownership of a life insurance policy to an ILIT, policyholders can remove the death benefit from their taxable estate. This trust can provide the following advantages:
- Tax Efficiency: Proceeds are excluded from estate taxes.
- Control: The grantor can specify how and when beneficiaries receive the funds.
- Creditor Protection: Assets held in an ILIT are typically shielded from creditors of the beneficiaries.
For high-net-worth families, establishing an ILIT can significantly enhance the effectiveness of life insurance in estate planning.
Case Study: Strategic Use of Life Insurance
Consider a family with a $25 million estate, with $15 million in illiquid assets that include a family business and real estate. Estate taxes could significantly deplete the value of the estate, leaving heirs with insufficient resources to preserve these assets.
By purchasing a $5 million survivorship life insurance policy through an ILIT, the family can:
- Provide liquidity to cover estate taxes without selling the business or property.
- Provide a fair distribution of assets to heirs.
- Avoid including the life insurance proceeds in the taxable estate.
Integrating Life Insurance into Your Estate Plan
At Granite Harbor, we recognize that life insurance is not a one-size-fits-all solution. Our approach involves evaluating your estate planning objectives, financial circumstances, and family dynamics to recommend tailored life insurance strategies. By incorporating life insurance into a comprehensive estate plan, we help ensure that your wealth is preserved, distributed according to your wishes, and enhanced for future generations.
Trust Structures
Trusts allow for greater control over how and when assets are distributed to beneficiaries. Investment decisions within trusts can align with specific estate planning objectives:
- Revocable Trusts: These can offer flexibility during the grantor’s lifetime and help avoid probate.
- Irrevocable Trusts: These remove assets from the taxable estate and can be used to shelter wealth, particularly when paired with growth-oriented investments.
Dividend-Paying Stocks and Bonds
For heirs who may rely on inherited wealth for income, dividend-paying stocks and high-quality bonds can provide a steady revenue stream. These investments can also be tax-efficient if structured appropriately within trusts or tax-advantaged accounts. For stocks in non-tax-advantaged accounts, it is also important to understand the step-up in basis, which adjusts the stock's tax basis to its market value at the time of the owner's death, which can help mitigate potentially large capital gains taxes.
Real Estate
Real estate can be a valuable asset for intergenerational wealth transfer. Key benefits include:
- Step-Up in Basis: Beneficiaries inherit property at its current market value, which can reduce significant capital gains taxes.
- Income Potential: Rental properties can provide heirs with ongoing income streams.
Private Equity and Alternative Investments
These assets offer growth potential but are often illiquid. They can be suitable for sophisticated estate plans where liquidity is not an immediate concern and heirs have the capacity to manage complex investments.
Mitigate Taxes Through Investment Selection
Taxes are among the most significant challenges in estate planning. The following strategies can mitigate tax impacts:
- Annual Gift Exclusions: Leveraging the annual gift tax exclusion ($19,000 per recipient in 2025) allows families to transfer investments gradually without incurring tax consequences.
- Charitable Remainder Trusts (CRTs): These trusts enable individuals to donate appreciated assets, mitigate capital gains taxes, and can create an income stream for heirs or themselves.
- Generation-Skipping Transfer (GST) Trusts: For families aiming to preserve wealth across multiple generations, GST trusts can reduce tax burdens by bypassing intermediate estate taxation.
Aligning Investments with Family Goals
Estate planning is often an emotional and value-driven process. Beyond financial mechanics, it’s an opportunity to pass down lessons, ethics, and priorities. Investments can reflect these intentions:
- Impact Investing: Allocating funds to environmental, social, or governance (ESG) assets so that wealth aligns with family values.
- Philanthropic Foundations: Establishing family foundations or donor-advised funds support charitable giving while creating a legacy of social impact.
The Importance of Professional Guidance
Navigating investment decisions for estate planning requires an understanding of tax laws, market dynamics, and family dynamics. High-net-worth individuals benefit from professional advice to balance these considerations effectively.
At Granite Harbor Advisors, we take a holistic approach, integrating investment strategies with broader estate planning objectives. Our expertise in tax-efficient investments, trust structures, and private markets allows us to tailor every client’s plan to their unique goals.
A Legacy Worth Building
Choosing the right investments for estate planning goes beyond securing financial stability—it’s about creating a meaningful and lasting legacy. With the right strategies, families can pass down not only wealth but also values and opportunities that empower future generations.
Granite Harbor Advisors is here to guide you through these important decisions, helping ensure that your legacy is as enduring as your aspirations.