Ultra-High Net Worth Tax Planning Strategies

Taxation is a fairly complicated process, and you need to understand it to the best of your abilities. There are various taxes you have to pay throughout your life, such as capital gains tax, property tax, inheritance or estate tax, sales tax, consumption tax, and the list goes on. Fulfilling all these tax obligations can consume a considerable portion of any individual’s precious time and income. Moreover, the tax burden is significantly higher for ultra-high net worth individuals, who bear the burden of additional taxes such as the progressive income tax. To understand how to reduce your tax liability, you need to get started with ultra-high net worth tax planning. If you have $5 million or more worth of liquid assets, you should request a free copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning to learn about some crucial tax-saving strategies.

STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION

7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

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At Pillar Wealth Management, our fiduciary, fee-only wealth advisors offer comprehensive financial recommendations to clients with $5 million to $500 million in liquid assets. Our team can even execute specific tax planning strategies that apply to wealthy individuals. Sign up for a free introductory consultation with one of our expert advisors to learn more about our tax planning services.

What Is Tax Planning?

Tax planning refers to the process of assessing a financial situation or plan to ensure that each element works in harmony to help you pay the minimum possible amount in taxes. A plan that minimizes your tax liability is considered to be tax-efficient.

Tax planning is a crucial aspect of every person’s financial plan. Lowering your tax burden and maximizing your contribution to retirement funds play a major role in keeping you financially secure.

Effective tax planning includes several considerations, including the timing of income, the size and timing of purchases, and planning for other expenses. In addition, the combination of investments and your retirement strategies needs to be in line with your tax filing status and deductions to attain ideal results.

Why Is Ultra-High Net Worth Tax Planning Important?

As an ultra-high net worth individual, your goal for saving and investing may be to preserve wealth, generate income, or accelerate growth. Irrespective of your goal, tax planning plays a major role in securing your wealth and making the most of what you have. Here are some benefits of ultra-high net worth tax planning.

1. A Lower Tax Burden

Let’s start with the biggest benefit — minimizing your obligation to pay capital gains tax, income tax, and wealth tax, along with other taxes on your assets, savings, investments, and pensions.

If there is a more tax-efficient method to secure your assets and capital, you should definitely explore it to see if it is feasible for you. However, many ultra-high net worth taxpayers fail to do so and eventually pay more taxes than they need to. This might entail capital gains tax when switching between various investments or income tax on bank interest that you are not withdrawing.

In addition, you could miss out on other available tools in your state of residence that could reduce your tax obligation.

2. A Lower Tax Obligation for Your Heirs

It’s an obvious fact — the less tax you pay in your lifetime, the more you can pass on to or spend on your beneficiaries. Moreover, some investment portfolios may reduce the inheritance tax obligation for your heirs. Having the right life insurance policies can be incredibly tax-efficient for purposes of estate planning.

The best solution is a strategy that reduces inheritance tax while providing tax-efficient investment income and growth throughout your life.

3. Increased Real Investment Returns

In this global climate of economic uncertainty and long periods of very low bank interest rates, effective tax planning even plays a significant role in allowing investment returns to exceed living costs.

At the end of the day, the most important factor in assessing the value of investments is real returns after all the expenses, costs, inflation, taxes, and management fees have been deducted. For example, real estate can generate fairly high investment returns in the long run, but with the application of wealth and capital gains taxes, the tax burden can be quite high compared with other assets.

When it comes to investments, you should start by making sure that your investments are properly allocated, and your portfolio is correctly diversified and specially designed to suit your financial goals, requirements, investment horizon, risk tolerance, and personal circumstances. In our book for individuals with $10 million and more, we talk about why smart investment is all about asset allocation, guided by your goals — not by Wall Street methods and beliefs.

Without smart planning, you could find your investment returns considerably lowered by taxes that could’ve been reduced or eliminated altogether.

How Do Rich People Avoid Gift Tax?

The gift tax tends to apply only to the wealthiest of households because of the taxes’ high exclusions. This is because the goal of the gift tax is to prevent affluent families from avoiding estate tax by gifting all their money to each new generation.

Nevertheless, this doesn’t mean that you cannot avoid gift taxes. If your individual net worth is over $12.06 million, it’s time for you to start planning how you can avoid paying as much of the gift tax as possible. You can also request a free copy of our book 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning to learn more about estate planning and how it can help you reduce gift tax.

1. Stay Within the Gift Tax Limit

One way in which the rich avoid paying gift tax is by staying within the limit defined by the IRS. In the 2021–2022 tax year, the limit was set at $16,000 per recipient.

Basically, the wealthy can give $16,000 in gifts to as many individuals as they like without having to pay the gift tax. The moment they exceed that amount to any recipient, they will have to pay the gift tax.

It’s important to understand what is included in the $16,000 gift tax limit. Gifts can entail anything of value and aren’t limited to money. The IRS categorizes investments, assets, and ongoing income without reason as “gifts.” However, there are some exceptions that might allow you to exceed this amount.

2. Structure Your Gift

Another scheme the rich use to avoid paying gift tax is to spread out their gifts over years, ensuring they do not exceed the $16,000 limit in any tax year. This strategy maximizes the amount they can give, but spreading it out over the years can lower the taxes owed.

For instance, if Bill wants to give his single adult daughter $20,000, he will first write her a check for more than $15,000 at Christmas and wait until the New Year to give her the remaining amount. If you want to know more about how this works, register for a free video chat session with us.

3. Give a Gift for Medical Expenses Directly

One of the most significant exceptions to the gift tax limit is money given specifically for medical expenses. Nevertheless, the gift needs to be paid directly to the insurance provider or medical institution. Gifts given directly to the recipient with the objective of covering medical expenses will still be subject to the gift tax limit.

For instance, if a wealthy individual wanted to cover the costs for their grandmother to stay in a nursing home, they would have to work directly with the organization for the bill. This would enable them to regularly pay for the medical costs without stressing about surpassing the yearly gift limit.

Understanding Taxes on Billionaires

If you are ready to join the billionaires club, you might wonder how billionaires manage their wealth and pay taxes. To help you out, we will look at two key questions related to billionaires — how billionaires are taxed and how do they pay for things.

How Are Billionaires Taxed?

Billionaires are subject to a number of taxes, including capital gains tax, income tax, gift tax, and estate tax. However, a report reveals that billionaires pay a federal tax rate of 8.2% on average which is less than 50% of what a lot of middle-class employees pay.

This is because billionaires earn a major chunk of their income through assets such as stocks instead of wages and salaries. When the regular person gets their paycheck, their income is taxed immediately. However, those who earn wealth from stocks along with other assets are taxed if and when they sell their asset at a profit.

Moreover, if they are taxed, it is at a rate lower than ordinary income. Due to this, affluent Americans keep their investments without paying any taxes for several years, generally until their demise. These individuals can then give the assets to their children and grandchildren without paying capital gains taxes.

Nevertheless, billionaires might have to pay more taxes as President Biden plans to tax such assets even if they have not been sold. Biden’s 2023 budget proposes a 20% minimum tax on the income — including unrealized investment income — of households with at least $100 million in assets.

Termed the “Billionaire Minimum Income Tax,” Biden’s proposal would require the top 0.01% of wealthiest families in America to pay at least 20% on their income and unrealized gains on assets such as stocks. Feel free to sign up for a video meeting with one of our wealth advisors to learn more about President Biden’s proposal and its implications for billionaires.

How Do Billionaires Pay for Things?

Billionaires invest a large portion of their money. They also purchase luxury items such as private jets, luxury real estate, islands, vintage cars, yachts, and jewelry.

Generally, billionaires make purchases on credit (for personal expenses) and use the passive income from their investments to settle debts (if they have any). If it’s an acquisition or business expense, they might sell some of their shares if their wealth comes from the shares of a publicly-traded company. An example of this is Jeff Bezos selling off a billion in Amazon stock a year to fund his space exploration company Blue Origin. On the other hand, if a billionaire gets his income from real estate, they might sell some properties as required.

Get Started with Tax Planning Today

If you want to secure and build your wealth, it is imperative that you use proper tax planning.

At Pillar Wealth Management, we offer comprehensive tax planning services to help you save money. One of the strategies we use to help our clients save on taxes is tax loss harvesting.

Tax loss harvesting is a process where you sell certain investments at a loss to offset gains made by selling other investments. As a result, you only have to pay taxes on your net profit.

You can use the income created by selling the losing investments to buy other investments that have a higher chance to increase in the future and help you recover your money. You can then use the future profits to balance out the losses, hence creating a lucrative cycle of tax savings.

Recently, we helped a client save more than $30,000 worth of taxes solely by managing their profits and losses. If you have $5 million or more in investments and want to use tax loss harvesting strategies, make sure to sign up for a free copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning. You can even book a video consultation with one of our financial advisors to get started with tax loss harvesting.

Authors

AUTHORS

Hutch Ashoo

Chris Snyder

To be 100% transparent, we published this page to help filter through the mass influx of prospects, who come to us through our website and referrals, to gain only a handful of the right types of new clients who wish to engage us.

We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.