Advanced Tax Planning for High Net Worth Individuals

Tax planning for high-net-worth individuals is a central component of wealth preservation. Their diverse income streams, complex investment portfolios, and significant assets create unique tax challenges where poor planning can erode wealth. A strategic approach must consider the interplay of income, investment, and transfer taxes to align with long-term financial goals and adapt to shifts in tax legislation.

Managing Investment-Related Taxes

A primary focus of tax planning is managing taxes from investment portfolios. Profits from assets held for one year or less are short-term capital gains, taxed at ordinary income rates up to 37%. In contrast, profits from assets held for more than one year are long-term capital gains, taxed at lower rates of 0%, 15%, or 20%, depending on taxable income.

For high-income filers, most long-term gains are taxed at 15% or 20%. In 2025, the 20% rate applies to single filers with taxable income over $533,400 and married couples filing jointly with income over $600,000. An additional 3.8% Net Investment Income Tax (NIIT) may also apply. Holding appreciating assets for more than a year is a straightforward tax-management technique.

Tax-gain harvesting involves selling appreciated assets during a year when the investor’s income is unusually low, such as during a transition into retirement. Realizing long-term capital gains in a year that places them in a lower tax bracket can reset the asset’s cost basis at a higher value with a minimized tax liability.

Tax-loss harvesting involves selling investments that have decreased in value to realize a capital loss. These losses can offset capital gains realized elsewhere in the portfolio. If capital losses exceed gains, up to $3,000 of the excess loss can offset ordinary income annually, with any remaining losses carried forward to future years.

The “wash sale” rule prohibits claiming a loss on a security if the same or a “substantially identical” security is purchased within 30 days before or after the sale. To avoid this, an investor must wait at least 31 days to repurchase the security. Alternatively, they can immediately reinvest the proceeds into a similar but not identical investment, such as an ETF from a different provider tracking a similar index.

Asset location is a strategy that involves placing different types of assets into accounts with different tax treatments. Tax-inefficient assets, like corporate bonds and actively managed funds, are best held in tax-advantaged accounts such as 401(k)s or traditional IRAs to grow on a tax-deferred basis. Conversely, tax-efficient assets like individual stocks and index funds should be held in taxable brokerage accounts, where the investor controls when gains are realized at lower long-term rates.

Income Deferral and Reduction Strategies

A Roth conversion involves transferring funds from a pre-tax retirement account, like a traditional IRA, into a post-tax Roth IRA. The converted amount is taxable income in the year of the conversion, but future qualified withdrawals from the Roth IRA are tax-free. This is effective for those who expect to be in an equal or higher tax bracket during retirement.

A 10% penalty may apply to withdrawals of converted funds if taken within five years of the conversion, with a separate five-year clock for each event. There are no income limitations on who can perform a Roth conversion. Spreading a large conversion over several years can help manage the immediate tax impact.

The “Mega Backdoor Roth” strategy allows for larger contributions to a Roth account for those whose 401(k) plans permit after-tax contributions and in-service conversions. After maxing out standard 401(k) contributions, an individual can make additional after-tax contributions up to the overall IRS limit ($70,000 for 2025 for those under 50). These after-tax amounts can then be converted to a Roth 401(k) or rolled over to a Roth IRA, allowing them to grow and be withdrawn tax-free in retirement.

Investing in sources of tax-exempt income, such as municipal bonds, can also reduce taxable income. Interest from these bonds is exempt from federal income tax and may also be exempt from state and local taxes for in-state investors. To compare them to taxable bonds, investors can calculate the tax-equivalent yield, which determines the yield a taxable bond needs to match a municipal bond’s after-tax return.

For owners of pass-through businesses, the Qualified Business Income (QBI) deduction, set to expire after 2025, offers a significant tax reduction. This provision allows eligible taxpayers to deduct up to 20% of their QBI, which is the net income from a qualified U.S. business. The deduction reduces taxable income but not adjusted gross income, and for higher-income taxpayers, it may be limited based on W-2 wages paid and the basis of business property.

Tax-Efficient Wealth Transfer Techniques

A primary tool for managing estate and gift taxes is the annual gift tax exclusion. For 2025, an individual can give up to $19,000 to any number of recipients without incurring gift tax or using their lifetime exemption; a married couple can give up to $38,000 per recipient. Consistent use of this exclusion can reduce a taxable estate over time.

Gifts exceeding the annual exclusion count against the lifetime gift and estate tax exemption, which is $13.99 million per person for 2025. This high exemption amount is scheduled to revert to a lower, inflation-adjusted level of approximately $7 million after December 31, 2025, unless Congress extends it.

Irrevocable trusts are used to transfer assets beyond what direct gifts allow. When a grantor transfers assets into an irrevocable trust, those assets are removed from their taxable estate. This means the assets and their future appreciation can pass to beneficiaries without being subject to estate tax upon the grantor’s death.

A Grantor Retained Annuity Trust (GRAT) is designed to transfer asset appreciation to beneficiaries with minimal gift tax. The grantor funds the GRAT and receives a fixed annuity payment for a set term. If the assets in the GRAT appreciate at a rate higher than the IRS-specified interest rate, the excess appreciation passes to the beneficiaries free of gift and estate tax.

A Spousal Lifetime Access Trust (SLAT) is a strategy for married couples where one spouse makes a gift into an irrevocable trust for the benefit of the other. This removes the assets from their combined estates while allowing the beneficiary spouse to receive distributions, providing indirect access to the funds. Upon the beneficiary spouse’s death, the remaining assets pass to other beneficiaries outside of either spouse’s estate.

An Irrevocable Life Insurance Trust (ILIT) is a vehicle designed to prevent life insurance proceeds from being included in a taxable estate. The trust is created to be the owner and beneficiary of the life insurance policy. The insured makes annual gifts to the ILIT to pay the premiums, and upon death, the proceeds are paid to the trust for distribution to beneficiaries, completely outside of the taxable estate.

Advanced Charitable Giving Approaches

A highly effective method for charitable giving is the direct donation of long-term appreciated securities to a qualified public charity. This provides a dual tax benefit: the donor can take a charitable deduction for the full fair market value of the securities and also avoids paying the capital gains tax that would have been triggered by a sale. The deduction is limited to 30% of the donor’s adjusted gross income (AGI) annually, with a five-year carryforward for any excess.

Donor-Advised Funds (DAFs) offer a flexible approach to philanthropy. A donor makes an irrevocable contribution of assets to a DAF, takes an immediate tax deduction for the full contribution, and the funds can then grow tax-free. The donor retains the ability to recommend grants from the DAF to qualified charities over time. This allows for “bunching” several years of contributions into a single year to exceed the standard deduction while distributing the funds over a longer period.

A Charitable Remainder Trust (CRT) is a split-interest trust that provides an income stream to the donor or other beneficiaries, with the remaining assets eventually passing to a charity. The donor transfers assets into the CRT and receives an immediate partial income tax deduction. The trust can sell the assets without immediately paying capital gains tax and reinvest the proceeds to generate income.

The trust pays an income stream to its non-charitable beneficiaries for a set term or for their lifetimes. At the end of the term, the remaining assets are distributed to the designated charity. The two main types are the Charitable Remainder Annuity Trust (CRAT), which pays a fixed dollar amount, and the Charitable Remainder Unitrust (CRUT), which pays a fixed percentage of the trust’s annual value.