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How Taxes And Fees May be Taking Huge Chunks of The Affluent’s Wealth

When it comes to costs associated with investment management and financial services for the affluent, there are two critical issues. First, let’s make sure they are reasonable and, secondly, if they are reasonable, let’s make sure you get the biggest bang for your buck.

While it sounds simple, the truth is it can be tricky to spot and calculate all the tax, investment management fees and costs that are eating away at your wealth. Costs can take big bites out of the returns you actually get. Here is a sample of how you may be over-paying without even knowing it.


As we reflect on the past year and why families with large estates, those exceeding $8 million, came to us looking for advice, what we conclude is that there is a surprising amount of confusion over estate taxes. Most affluent families have heard of the devastating effects

of estate taxes, but few realize the true and dramatic extent of the devastation that this can cause to their estates and loved ones.

Furthermore, our experience and the research we continue to see show that most wealthy families are not well-positioned to deflect the tragic consequences of the looming 45 percent estate tax.

Many wealthy families are hopeful that the estate tax law will be changed, but the reality is that Uncle Sam is counting on this generation’s estate tax proceeds. Therefore, it would be remiss to believe that Congress would make changes to the tax law that would dramatically undermine tax revenues to the government.

We would propose that if the law is changed, then the wealthiest Americans would still be subject to some form of substantial taxation.

Here is a sample of real-life reasons of why we were contacted in the past year by families with net worths ranging from $8 million to

$50+ million:

  1. I recently lost my spouse and I heard that estate taxes could ultimately cost me over $12 million, plus when my $4 million IRA is taxed, I stand to lose over $1.4 million to income taxes, what should I do to protect my wealth and pass it along to our kids?
  2. We have a $12 million net worth and keeping Uncle Sam’s sticky fingers out of our estate is our top
  3. My family set up a living trust in the‘70s, I am retired and very interested in What should I be doing?

Although it may appear that these families have different concerns, the issue at heart is taxes or in other words, how they can get the most income or pass along the maximum net worth to their loved ones/causes.

Did you know that without proper planning, a $15 million estate can lose about $7.5 million to estate taxes, leaving the heirs to split the other $7.5 million? Instead, why not give your entire estate away twice – 100% to charity and 100% to your heirs.

What is wealth management all about if not efficiently transferring the most you can to your heirs? What we described above uses a little-known strategy of obtaining a tax-deductible $15 million life insurance policy by donating the premium to your own charitable foundation.

The tax savings of approximately 50 percent are gifted to your heirs or an irrevocable trust to purchase a $7.5 million last-to-die or individual policy for your heirs. After your death, your beneficiaries receive about $7.5 million from the estate after taxes and $7.5 million tax-free from the proceeds of the life insurance policy. Your favorite charity also receives $15 million upon your death.

Another tax the affluent face is the capital gains tax. Assuming you make money, you’ll pay a capital gain tax to Uncle Sam. but not all capital gains taxes are equal.

If you had a choice, you would hold securities for at least 12 months so you only get hit with the federal long-term capital gains tax of 15 percent rather than a short-term capital gain tax, which can be more than double the long-term rate (not to mention state taxes).

If you use a money manager, however, this can be tricky. Fund managers are not paid to fret about taxes; they are rewarded for taking profits – short-term or long-term – and hopping in and out of stocks is their business.you could easily lose 30 percent or more of the return you make due to taxes. put another way, how would you like to make $100,000 but only pocket $70,000 after you pay Uncle Sam?

One way to reduce the pain would be via gain/loss cultivation. Cultivating gains or losses to minimize your tax bite is a great planning strategy. For example, let’s say you sell a house you’ve been living in for three years for $2.4 million.

If you have a cost base of $1.5 million, after using the gain exemption of $500,000, you’ll be left with a capital gain event of $400,000. If you can cultivate $400,000 in losses from your miscellaneous managers and investments, you would save approximately $96,000 in taxes.

It’s not enough to look at the simple return on an investment; we must know the net after-tax rate of return before we conclude how good it is. What really matters to all of us is how much we pocket when all is said and done.

If you’re a high-net-worth individual, here are some tax-saving techniques you might want to contemplate. but keep in mind if your net worth is under $5 million, this is probably not for you.

Avoiding a “fire sale” on your business:

If you don’t want your heirs to have to liquidate a business or sell assets to pay estate taxes, consider a wealth replacement trust. A businesswoman with a $22 million company, a $3 million retirement plan and a $2 million home could lose well over 50 percent of her net worth to estate taxes and income

taxes. A large chunk of those taxes are due soon after death. If the beneficiaries wanted to hold onto the business and the home, they would need to come up with well over $13 million to pay the taxes. Without a wealth replacement trust to pay those taxes, they may be forced to give up the business through a fire sale.

Avoiding capital gains taxes on appreciated assets:

Would you like to sell a highly appreciated asset, such as a stock or real estate, and avoid capi- tal gains taxes, receive a tax deduction and get an income for life? We had a client who accumulated a startup’s stock for 17 cents per share. Within three years, the stock was worth $71 per share after splits.

When it was time to retire, her wealth was concentrated in that stock, which paid no income. We set her up in a charitable remainder trust and gifted her stock to the trust. The trust, in turn, sold the stock and, as a charity, avoided capital gains taxes.

She is now receiving a guaran- teed income for as long as there is money in the trust. by gifting the stock to the charitable trust, her estate was reduced by the value of the stock thus reducing future estate taxes.

And gifting the stock to a charity gave her a deduction on her income taxes. The only difficulty with a charitable remainder trust was convincing the heirs to go along with the concept because assets gifted to the trust will go to charity upon her death. Our client got around this by establishing a wealth replacement trust to replace the gifted assets to the heirs tax-free.

Taxes on large IRAs:

If your estate is worth more than $5 million, your maximum estate tax is 40+ percent. Upon your death, your retirement accounts (401(k) accounts, IRAs etc.) will need to be distributed to your heirs and will be taxed at their income tax bracket. If the heirs are employed, they could lose another 40 percent or more of these dollars due to income taxes. In the end, you could lose 70 percent of your retirement account assets to Uncle Sam. Through proper beneficiary designations, charitable gifting strategy and advanced planning, this problem can be tackled.

Additional tax-saving techniques:

Supporting organizations, limited family partnerships and institutional guarantee installment sales are just a few other techniques that can help you accomplish your goals related to philanthropy, tax deferral, estate tax reduction, creditor protection or spousal protection and much more.

The bottom line is, taxes and tax strategies are complex. Too many wealthy individuals and business owners think they are well- protected because they set up a living trust 10 years ago with their attorney. Well, if you’re worth more than $5 million, it’s probably time for you to have advanced planning beyond the living trust.