Estate planning is essential for preserving wealth and ensuring a smooth transition of assets to the next generation.

For high-net-worth individuals (HNWIs), estate planning is far more challenging. They have larger estates and more complex assets and often face much higher tax bills.

This article is part of our Practical Guide to Estate Planning, which provides a complete overview of the topic. In this guide, we explore everything HNWIs need to know about estate planning to protect their wealth and create a lasting legacy.

Benefits of Estate Planning for HNWIs

An estate plan should do more than divide your wealth. It should reflect your values, goals, and legacy. It should also make the transfer of assets smooth and seamless.

Estate planning for HNWIs can provide the following benefits:

• Preserve wealth: Ensuring assets are protected and maintained for future generations
• Minimise tax liabilities: Smart planning helps cut down the tax bill legally. This means your family keeps more of what you’ve built.
• Asset protection: Offers a way to protect your wealth from creditors and legal challenges using tools like trusts
• Support your loved ones: Decide how much you want to leave to your loved ones and when and how they will access the assets.
• Business continuity: If you own a business, you should plan who will take over and how to ensure continuity.

Key Estate Planning Tools and Strategies for HNWIs

Those with large estates typically use multiple tools as part of their legacy planning. Some of the most important components of an estate planning strategy for high-net-worth individuals are:

Trusts

Trusts are legal arrangements that hold, manage and distribute assets. They offer:

• Tax planning: Trusts can mitigate IHT and CGT
• Asset protection: Prevent assets from creditors and legal challenges
• Privacy: Unlike wills, trusts avoid public probate

Wills

A will is the foundation of your estate plan and is different to a trust.

While a trust holds and distributes assets, a will says who should inherit what. It is a legal document that outlines how your assets will be distributed after your death.

Power of Attorney

Power of attorney (POA) is another legal document that appoints someone to make financial or health decisions on your behalf if you can’t. There are three main types of POA:

Ordinary power of attorney (OPA)

An OPA can only manage financial affairs while you still have mental capacity. It’s typically used for a temporary period, such as when you’re travelling abroad or recovering from an illness. It becomes invalid if you lose mental capacity.

Lasting power of attorney (LPA)

LPA allows someone you trust to make decisions on your behalf if you lose mental capacity. There are two types: one for health and welfare and one for property and financial affairs.

If you are in the UK, visit GOV.UK to learn how to make, register, or end a lasting power of attorney.

Enduring power of attorney (EPA)

LPAs replaced EPAs in 2007; however, existing EPAs remain valid. They cover only financial decisions and must be registered if the person starts to lose capacity.

Lifetime Gifting

You can give away some of your wealth while you are alive as gifts. These gifts are exempt from Inheritance Tax (IHT) and may reduce your estate’s tax bill.

The rules around gifting vary depending on your location. In the UK, some of the following gifts that are exempt from IHT include:

1. Annual gift allowance: £3,000
2. Small gift exemptions: £250 per person each tax year
3. Wedding gifts: If someone is getting married, you can give up to:
1. £5,000 to a child
2. £2,500 to a grandchild or great-grandchild
3. £1,000 to any other person

Tax may apply if you die within seven years after giving them — this is known as the ‘7-year rule’. The tax rate ranges from 8% to 40%. The amount you pay depends on how many years after giving the gift you died.

Visit GOV.UK for more information on the rules of gifting.

Giving to Charity

For many wealthy individuals, legacy is about more than money. Giving to charity ensures your money contributes to something meaningful.

Gifts you leave to charity are tax-exempt. Leaving 10% or more of your estate to charity can reduce your IHT rate from 40% to 36%.

Life Insurance

There are several types of life insurance, including whole life, term life, and indexed universal life insurance. You can use life insurance to:

1. Pay off IHT bills
2. Help divide the estate fairly

When a life insurance policy is held in trust, the policy pays out a tax-free lump sum that can be used to settle the estate’s IHT bill quickly. This means your loved ones receive their full inheritance without needing to sell assets that hold sentimental value.

Trusts: An Effective Tool for HNWI Estate Planning

Trusts are a popular estate planning tool among HNWIs. They allow you to control how assets are distributed, protect wealth, reduce IHT and typically avoid probate.

There are various types of trusts. Some of these include:

• Bare trusts: The beneficiaries have access to the trust once they reach a certain age.
• Discretionary trusts: The trustee makes decisions, such as who receives the income and capital and how much each person receives.
• Interest in possession trust: Beneficiaries can access the income from the trust rather than the assets that generate it.
• Revocable/irrevocable trusts: Some trusts are revocable or irrevocable. While you are alive, you can change revocable trusts; irrevocable trusts cannot be changed.

International Estate Planning Considerations

Global citizens must consider estate laws in each country where they hold assets. Important factors include:

Having Multiple Wills

Laws differ widely; some countries do not recognise UK wills. If you have multiple residencies or assets in another country, you may need a separate will.

Double Tax

Those with multiple residencies or assets in another country may get taxed on the same income twice. Double taxation agreements (DTAs) and proper planning can help avoid this.

Offshore Trusts

These can protect overseas wealth. However, they must be set up correctly and follow international rules. Always get professional advice on complex products such as offshore trusts.

Learn more: Read our guide to international estate planning.