You often come across stories of inspirational individuals who have amassed significant wealth.
The journey of such individuals is often comprised of ambition, courage, hard work and relentless consistency. It’s extremely difficult to achieve “Ultra-High Net Worth” status in today’s ultra competitive world, but achieving “Ultra-High Net Worth” status is an even more difficult – and rarer – feat.
After all, only those families whose investable assets are valued over $30 million are considered to be “Ultra-High Net Worth”.
Although it would take exceptional levels of irresponsibility, or a major financial catastrophe to develop financial issues, such as foreclosure or bankruptcy with this sort of wealth, it’s not something that’s unheard of.
‘Riches to Rags’ stories have indeed made headlines in the recent past—especially during the financial recession of 2007—where many families went from ‘Ultra-High Net Worth’ to just ‘High Net Worth’, or bankrupt!
While UHNW families usually don’t have to deal with financial problems that plague the common man, such as struggling to make the rent, or being unable to make the payments on their car, they have an entirely different set of financial problems to worry about.
In order to successfully maintain a high-standard of living and sustain their riches across multiple generations, UHNW families have to make some smart financial planning decisions.
These include efficiently dealing with the changing tax codes, proper estate planning and making the best use of investment vehicles.
At Pillar Wealth Management, we have been providing effective wealth management services to Ultra-High Net Worth clients for over three decades (we actually wrote a hard cover book titled The Art Of Protecting Ultra-High Net Worth Portfolios And Estates; sells on Amazon).
Over the course of this article, we’ll outline 10 of the best strategies to grow and protect your family’s wealth.
Comprehensive Financial Planning
With above-average assets, you require above-average financial planning. As the financial situation of UHNW families is of a more complex nature, they have to deal with a wider array of concerns than a ‘normal’ family.
These include coping with higher taxes, dealing with a larger investment portfolio, managing multiple properties, and/or keeping track of your philanthropic activities.
Comprehensive financial planning enables the effective management of all these aspects, and helps you determine strategies to protect and build the wealth of your family. Unlike standard financial planning, this type of planning goes far beyond just your regular income projections and retirement savings. It covers all the facets of your financial affairs.
- Management of cash and debt
- Investment planning
- Retirement planning
- Estate planning
- Risk management
Comprehensive financial planning is generally comprised of these steps:
- A comprehensive discussion to outline your personal and family values and goals
- Making a financial forecast based on the current state of your finances
- Getting expert advice and recommendations
- Forecasting your finances based on the application of those recommendations
- A defined plan of action
Consolidating Your Assets
In an attempt to diversify their investments, UHNW persons and families often setup same type of investment accounts with multiple financial institutions. They believe that this is an effective way to reduce risk.
Actually, diversification is about how your money is invested, rather than where it’s kept.
Instead of diversifying your investment, setting up multiple same-type investment accounts can actually have an adverse effect, as it makes keeping track of your investments a lot more difficult.
Furthermore, there is a variety of other reasons why you should consolidate your assets with just one reliable advisor. The reasons are:
- Lower Costs: You’re likely to pay a higher cost when you open investment accounts with multiple financial institutions.
- Streamlined Administration: Fewer tax forms and accounts statements make it easier to keep track of your investments.
- No Duplication of Investments and Efforts: The odds are high for duplication of investments (i.e. less diversification) and efforts when you have two advisors, since their efforts aren’t usually coordinated.
- Simplified Estate Settlements: It becomes easier for your executor when they only have a single point of contact.
- Easier and More Efficient Retirement Planning: It becomes easier for your advisor to devise an efficient strategy of optimizing your retirement income when they have a better understanding of your various income sources.
Instilling Financial Responsibility in Your Children
While it takes years and years of hard graft to accumulate a substantial wealth, all of it can be lost in a proverbial moment.
Self-made individuals are aware of the true value of money as they have built their wealth through years of hard work. However, this essential value might not be shared by their children and grandchildren, who have grown up in a more privileged environment.
If you want your wealth to last across multiple generations, it’s crucial to teach the importance of financial responsibility to your children. There are various strategies that can help you in this regard.
The first one involves giving your children a reasonable allowance and instructing them to divide it into expenses, savings and charity. This helps children develop budgeting skills, instills the value of money in them, and teaches them to become socially responsible.
Another effective strategy is setting up a monthly budget that can cover the reasonable expenses and activities of the whole family. If your children ask you for something that exceeds the budget, tell them you will consider it next month.
Using Surplus Assets Effectively
Most UHNW individuals and families have surplus assets. Here are some effective ways to protect them.
- Consider gifting them to low-income family members. If the family member in question is underage, the taxes levied on any capital gains will be in accordance with their lower tax rate. However, the dividend and interest income will be attributed to you and you’ll be responsible for their taxes. If they are legal adults, they will have to bear the taxes levied on the asset-generated income, but again, at a significantly lower rate.
- In case of an insurance need, consider putting the assets into a life insurance policy which is tax-exempt. This way, you won’t have to pay any taxes on the income they generate. The income will be paid to the beneficiaries of the policy as a tax-free benefit after the settlement of your estate.
- Another way to avoid capital gains tax on surplus assets is donating publicly-traded securities that have gone up in value to qualified charitable organizations.
Effective risk management is a vital part of protecting your hard-earned wealth. Lots of UHNW individuals and families have lost considerable portions of their wealth in the past because they didn’t prepare for risks such as law suits and market volatility.
- Risk of Lawsuits: liability insurance; there are various ways to ensure the protection of your assets.
- Risk of Market Volatility: The best way to counter the threat of market volatility is diversifying your investments. In addition to diversifying investments by geographic location, industry and class, UHNW families can also reduce risk by taking the route of tax free bonds.
- Risk of losing Income: Unfortunately, serious illnesses and disabilities are a part of life and can befall anyone. Purchasing long-term care and critical illness insurance can protect your family from the risk of permanent or temporary income loss.
Giving to Charity
There are numerous strategies you can use to get the maximum out of the gifts you make to charity:
- As we’ve previously mentioned, capital gains tax isn’t levied on publicly listed securities, which have gone up in value once they have been donated to a qualified charitable organization. Furthermore, the receipt you receive depicts the current market value of the securities you have donated.
- If you want to create a lasting philanthropic legacy, consider setting up a charitable foundation. While you’ll have higher flexibility and better control with a private foundation, a public foundation would suit you better if you don’t want day-to-day involvement.
You can also create testamentary trusts through your will. It will provide income tax benefits to your beneficiaries, which they wouldn’t get with an outright inheritance.
However, in case of an outright inheritance, the income earned will be added to their regular income and taxed accordingly. This can potentially increase their tax rate and reduce their after-tax income.
Potential tax benefits aren’t the only plus point of testamentary trusts. You can also set them up to ensure that a child from another marriage or a disabled family member receives their inheritance.
Splitting the Family Income
Another effective way for UHNW families to reduce their tax burden is splitting the income.
Why? Well, the first reason is the American tax system, according to which, the higher your income, the higher the amount you owe in taxes.
By splitting the income between members of the family, (especially shifting it to low-income members) families can potentially save thousands of dollars in taxes.
Planning For Business Succession
If you plan to pass on your business to your children or your grandchildren, here are a few effective business succession planning strategies:
- Figure out which of your children has the ability and the interest to lead your business.After you have made a decision in regards of who is to be your successor, gradually start involving the chosen person in business matters. Have them meet the important business contacts, and slowly ease them into a role of responsibility. The duration of this transition should be 5 to 10 years.
- Have a financial plan in place which incorporates strategies like individual pension plans, an estate freeze for minimizing taxes, and insurance to provide protection against risks and unforeseen events. Include a shareholder’s agreement as well.
Vacation Property Planning
Ownership of a vacation property can be the cause of a variety of issues, especially if a family is involved. One major concern is passing along the property to the next generation without creating conflict. However, with some careful planning, not only can you pass along the property in a harmonious way, but you can also reduce taxes.
Here are some effective strategies:
- An inter vivos family trust is a good way to pass on a vacation property to your children. Not only will it enable you to avoid probate tax, but it will also allow you to defer future capital gains tax.
- If 2 or more children are to own the property, you can establish the ground rules by creating a co-ownership agreement.
Hutch Ashoo and Chris Snyder are co-founders of Pillar Wealth Management. We are a fee-only expert wealth management firm for High Net Worth and Ultra High Net Worth Individuals. With years of experience in financial planning and investment management, we can help guide you toward continued financial security.
We have 30+ years of experience and are published authors. Our bestsellers include a hardcover book titled, “Protecting Ultra High Net Worth Portfolio Estates”
We take a very active role in helping High Net Worth clients maintain and enjoy their wealth.
Call us today for a complimentary conversation with our expert advisors.