4 Tax Saving Strategies for Affluent Families to Reduce Your Liability & Preserve Wealth

The need for tax planning strategies often becomes strikingly clear for high-earning, wealthy families during the first four and a half months of the year. The US tax system is designed so that the higher the income, the greater the tax liability. Thus, strategic tax planning is crucial for affluent families, as income can come from salaries, investments, businesses, and more.

Tax planning is an essential practice for reducing tax liabilities. It involves strategically using financial instruments and tax regulations to reduce tax liabilities in the short and long term. Various strategies may be relevant depending on asset structure, financial goals, and income sources. These can include considerations for investment portfolios, philanthropic efforts, and the establishment of trusts.

Four Key Strategies to Reduce Taxes

Four key strategies can help affluent individuals lessen their tax burden. These strategies encompass important portfolio choices such as direct indexing, trust planning—with an emphasis on using irrevocable trusts—philanthropic planning to effectively share wealth, and collaborating with a CERTIFIED FINANCIAL PLANNER™ Professional to optimize the different methods for safeguarding wealth for yourself and future generations. We will explore these strategies in detail below.

1.    Portfolio Considerations

As part of a strategic portfolio management approach, tax-efficient investment strategies like Direct Indexing offers investors greater control over their holdings while optimizing tax efficiency. By directly owning individual stocks within a separately managed account (SMA), investors can customize their portfolios and strategically harvest tax losses to offset capital gains. This method can be particularly valuable for affluent investors looking to enhance after-tax returns and manage long-term wealth preservation within a well-structured portfolio.

Understanding Direct Indexing for Tax Savings

Direct Indexing is a strategy for managing capital gains and harvesting losses within a portfolio. With this approach, investors directly own the underlying holdings of a specific index in a separately managed account (SMA), weighted according to that index. The objective is to structure the SMA to replicate the index while allowing for customization to meet the individual investor’s needs. This contrasts with an index fund, where investors own a portion of the pooled fund’s assets, rather than the actual underlying stocks.

What are the benefits of Direct Indexing?

Direct indexing is one answer to how to avoid capital gains tax on investments. Investors can customize the holdings in their SMA according to their preferences (though there may be a difference in performance between the index and the SMA, known as the tracking error).

Specific to capital gains management, this strategy can be used to harvest tax losses, therefore offsetting current or future gains. This is done by:

1. Identifying holdings in the SMA that have decreased in value since the time of purchase,
2. Selling the holdings at a loss,
3. Reinvesting the monies to different areas of the portfolio or repurchasing the asset 31 days after the original sale to avoid the disallowance of the loss due to wash sale rules.   

This process requires attention and active management to identify opportunities for capital loss harvesting. Direct Indexing can be a beneficial investment strategy for affluent families who own highly appreciated assets or anticipate significant asset value appreciation. Capital losses can be accumulated over time and carried forward to offset future capital gains. Consulting with a financial advisor can help determine if this strategy is right for you.

2.     Irrevocable Trust Planning Strategies for Those with High-Net-Worth

For affluent families looking to preserve their wealth across generations, trust planning is a vital component of a comprehensive financial strategy. Irrevocable trusts provide both asset protection and tax benefits, ensuring that wealth is transferred efficiently while minimizing estate and gift taxes. By strategically placing assets in an irrevocable trust, individuals can safeguard their financial legacy, protect assets from legal claims, and reduce their overall tax burden. Below, we explore the key benefits of irrevocable trusts, their role in estate and gift tax planning, and different types of trusts that can be leveraged for long-term wealth preservation.

How Irrevocable Trusts Reduce Taxes and Protect Wealth

An irrevocable trust is a financial instrument designed to transfer assets out of the grantor’s name and control to designated beneficiaries. Once established and funded, the grantor cannot modify or revoke the trust without court approval or beneficiary consent. This loss of control provides significant legal and tax advantages, including:

• Avoid estate tax by removing assets from the taxable estate.
• Asset protection against lawsuits and creditors.
• Eligibility for government benefits by shielding assets from means testing.

Estate Tax Explained: How Affluent Families Can Minimize Their Tax Burden  

The estate tax is a tax on the transfer of property upon an individual's death. As of 2025, the federal estate tax exemption stands at $13,990,000, meaning any assets transferred over this amount will incur a 40% federal estate tax. In 2026, this exclusion is expected to decrease dramatically to $7,000,000, significantly increasing the number of estates impacted. So, it’s no wonder many of our clients come to us asking how to reduce estate taxes. Strategic trust planning can shift assets from the estate to mitigate a hefty estate tax bill.

This estate tax is one of only two federal taxes imposed by the Internal Revenue Service on money transfers that trust planning can help avoid. The other tax is the gift tax.

Gift Tax Rules for High-Net-Worth Individuals

Gift tax applies to assets transferred (or gifted) during an individual’s lifetime. In 2025, taxpayers can gift up to $19,000 per beneficiary per year without needing to file a gift tax form (Form 709). However, gifts exceeding this threshold reduce the grantor’s lifetime exemption, which is shared with the estate tax limit. Understanding that we cannot just gift our assets to beneficiaries before our passing, transferring assets into trusts during the grantor’s lifetime can greatly reduce the gift and estate taxes paid both during and after their lifetime.

The Best Irrevocable Trusts for Tax-Efficient Wealth Transfer

Qualified Personal Residence Trust (QPRT)

A QPRT is a trust funded with a personal residence. A QPRT allows individuals to transfer their primary residence into a trust, reducing its taxable value while continuing to reside in the home for a predetermined period.

Key Benefits of a Qualified Personal Residence Trust (QPRT)

• Any appreciation in home value is excluded from the taxable estate.
• Gift taxes apply only to the home’s value at the time of transfer, rather than its future appreciated value.
• After the trust term ends, ownership is transferred to beneficiaries, avoiding additional estate tax.

Critical Considerations for a QPRT

• If the grantor passes away before the trust term ends, the home reverts back to the taxable estate.
• The grantor must pay rent to continue residing in the home after the term expires.

Grantor Retained Annuity Trusts (GRAT)

A GRAT is a tax-efficient vehicle that allows individuals to transfer appreciating assets out of their estate while still receiving annuity payments over a set term. Since a GRAT involves so many moving parts, it is prudent to consult with your trust planning team on an ongoing basis.

Key Benefits of a Grantor Retained Annuity Trusts (GRAT)

• Growth beyond a predetermined rate (hurdle rate) is transferred tax-free to beneficiaries.
• Ideal for assets expected to appreciate, such as securities, real estate, or business interests.
• Grantors receive a fixed annuity payment during the trust term.
• Assets left in the trust at the end of the term will transfer to beneficiaries without gift or estate taxes if structured correctly.

Critical Considerations for a GRAT

• If the grantor dies before the trust term ends, the assets remain in the taxable estate.
• There is an exposure risk to generation-skipping transfer tax when transferring to beneficiaries who are more than one generation below the transferor grantor.
• A GRAT works best with a low hurdle rate, increasing the chances that the trust assets will grow beyond this threshold.

How is income generated from the GRAT taxed?

A GRAT is a grantor trust, meaning any income, gains, or losses generated within the trust will flow to the grantor and be taxed at their personal rate. This structure can be appealing for those aiming to maximize the wealth transferred to beneficiaries, as neither the trust nor the beneficiaries are liable for income taxes. Additionally, under current tax law, taxes paid on income produced from a GRAT are not subject to additional gift tax implications.

Dynasty Trust

Dynasty Trusts preserve wealth across generations, shielding assets from federal transfer tax. The grantor sets distribution terms and transfers wealth into the trust during the beneficiary's life. Upon the grantor’s death, assets in the trust, plus any appreciation, are excluded from their estate. The trust divides into sub-trusts, each with one beneficiary, ensuring income throughout their lifetimes. Upon their death, sub-trusts divide for future beneficiaries (the children of the original beneficiaries) until a predetermined termination date or event.

Key Benefits of a Dynasty Trust

• Assets and appreciation remain outside the taxable estate indefinitely.
• Funds are distributed to multiple generations without triggering additional estate or gift tax.
• A Dynasty Trust can continue indefinitely in Pennsylvania, allowing perpetual trusts.

Critical Considerations for a Dynasty Trust

• Beneficiaries neither control the assets nor are they permitted to change the trust's terms. As a result, trust assets are not part of their taxable estates.
• The Generation-Skipping Transfer (GST) Tax is deferred but may apply when the trust terminates.

How is income generated from a Dynasty Trust taxed?

Beneficiaries must pay income taxes on distributions. Income generated within the trust is taxed at trust rates, making it advantageous to fund these trusts with non-income-producing assets such as equities that do not pay dividends or tax-free municipal bonds.

Final Considerations: Is an Irrevocable Trust Right for You?

While irrevocable trusts provide significant tax and asset protection benefits, they also require careful planning and legal oversight. Establishing a trust involves long-term financial commitments, administrative responsibilities, and potential limitations on access to assets. Consulting with a financial advisor, estate attorney, and tax professional is essential to determine which trust strategies align with your wealth preservation goals.

By leveraging irrevocable trusts strategically, affluent families can create a secure financial legacy, optimize tax savings, and ensure their assets are protected and transferred efficiently across generations.

3.    Strategic Philanthropic Planning

Generosity can create a lasting impact—not just for the charitable organizations receiving support, but also for the individuals and families who give. With the right strategy, philanthropy can be a powerful tool for both social good and financial planning, helping donors align their values with long-term wealth preservation. A private family foundation offers high-net-worth individuals an opportunity to formalize their charitable giving while also gaining significant tax advantages.

A Private family foundation is a tax-exempt non-profit organization established under Internal Revenue Code (IRC) Section 501(c)(3), provided it meets all compliance requirements. Once assets are within the foundation, they can be invested to generate growth and income, which must be distributed to charitable organizations. To maintain its tax-exempt status, the foundation is required to distribute at least 5% of its assets annually to charitable causes.

Key Benefits of Using Private Foundation in Tax Planning

A private family foundation offers multiple benefits as part of a comprehensive tax and estate planning strategy, particularly for high-net-worth individuals seeking to establish a lasting philanthropic legacy.

There are layered benefits to implementing a private foundation into a financial plan.

1. Significant Tax Deductions: the foundation’s creators receive a tax deduction on contributions to the foundation, depending on security type:
   • Cash Gifts – Donors can deduct up to 30% of their Adjusted Gross Income (AGI).
   • Securities – Can deduct up to 20% of AGI for long-term publicly traded stock.
2. Capital Gains Tax Avoidance: Donors can donate highly appreciated assets to the foundation, secure a tax deduction and avoid capital gains taxes on the sale of those assets.
3. Estate Tax Reduction: Assets added to a Family Foundation are removed from the donor’s estate, helping to minimize estate tax exposure while ensuring long-term charitable giving.

Considerations Before Establishing a Family Foundation

While a private foundation is a powerful tax planning tool, it comes with administrative responsibilities:

• As a separate legal entity, the foundation must file its own annual tax return.
• Detailed recordkeeping is required to maintain compliance with IRS regulations.
• Donors should work closely with financial advisors, estate planners, and tax professionals to ensure proper structuring and long-term sustainability.

A family foundation provides tax efficiency and a lasting charitable impact for affluent families looking to integrate philanthropy into their financial planning. Consulting with an expert can help determine if this approach aligns with your financial and legacy goals.

4.    Work with a CERTIFIED FINANCIAL PLANNER^TM Professional

This list only scratches the surface of the tax reduction opportunities available for individuals who have amassed significant wealth. Collaborating with CERTIFIED FINANCIAL PLANNER^TM practitioners, such as those at Allegheny Financial Group, can help maximize your tax savings. Our financial advisors for high-net-worth clients are exceptionally versed in these tactics to support the wealth of our clients.

When implementing strategies like those mentioned above, it’s essential to remember that it’s not just the plan; it’s the planning itself. The listed strategies, along with others, are ongoing and require consistent monitoring and review of progress toward goals. Working with a financial professional can simplify this process for you.

Final Thoughts

Affluent families have worked for years, sometimes decades, to accumulate the wealth they own. Proper and efficient use of tax law and financial instruments can ensure the retention of as much income and assets as possible. Consulting with a Certified Public Accountant and financial advisor can ensure you are on track to do this.

Maximizing your wealth requires expert planning. At Allegheny Financial Group, our CERTIFIED FINANCIAL PLANNER^TM professionals specialize in trust and tax-efficient wealth strategies. Schedule a consultation today to secure your financial legacy.

Author: Maria Koedel, CFP® | Allegheny Financial Group | March 2025

The information included herein was obtained from sources which we believe reliable. The views in this article are being provided for informational purposes only. It does not represent any specific investment or tax advice and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.

Allegheny Financial Group is an SEC Registered Investment Advisor.