Nobody likes taxes, but they are an inevitable part of life, right? Maybe not. Advanced tax planning can help wealthy, comfortably wealthy, and ultra-high-net-worth individuals and businesses significantly reduce the amount of money they lose to taxes.
With advanced tax planning, everyone wins. Individuals and businesses have more money to put to good use, growing companies, giving to charity, and passing on to their heirs. But who is considered high net worth, and when is a wealth tax plan worth the investment?
Who Qualifies at Ultra High Net Worth?
Individuals and businesses, from the simply wealthy to ultra-high net worth, can benefit from tax planning and should work with a qualified tax professional. However, there are different considerations for individuals in each of those groups.
Wealthy individuals
Wealthy individuals are those who control over $5 million in assets. These individuals might not even realize they are wealthy or that they could benefit from advanced tax planning. They may own a home and have built up a considerable IRA. Or they have a primary home, investment property, and stock portfolio that has performed well in recent years.
If this applies to you, your increased wealth means you need a new approach to your relationship with taxes. You could benefit from a more informed and strategic approach to your taxes.
High Net Worth Individuals
High-net-worth individuals have between $5 and $10 million in assets. They often don’t see themselves as wealthy and many don’t recognize the need for tax planning. These are often driven, intelligent individuals who have acquired wealth through hard work and savvy financial decision-making.
However, they don’t always realize they could benefit from the same financial planning used by billionaires. This category of individuals often gets crushed by taxes; they make enough money to owe almost half of it to Uncle Sam, but they don’t utilize the tax planning and strategies employed by the uber-wealthy.
Comfortably Wealthy
The comfortably wealthy have assets between $10 and $25 million. These individuals usually know they need financial advice and may work with investment brokers, wealth managers, and financial advisors.
However, in our experience, they often struggle to get sophisticated and knowledgeable advice on creating a long-term plan for managing their taxes. As a result, they end up paying tens of thousands, hundreds of thousands, or even millions of dollars in taxes that they could have avoided.
Ultra High Net Worth
Ultra-high-net-worth individuals don’t usually choose to categorize themselves this way. However, different financial situations require unique approaches from a tax planning perspective, so it is helpful to define categories. Ultra-high-net-worth individuals are those who have more than $25 million in investable assets.
Financial complexity is also something we consider when identifying ultra-high-net-worth individuals. These individuals may have multiple businesses, properties, or complicated portfolios. Their assets may include art, NFTs, or cryptocurrency.
Because of the complexity of their finances, these high-net-worth individuals need a comprehensive tax strategy that aligns with their goals and takes a long-term approach. They need tax advisors who understand the challenges of this kind of wealth and can coordinate various tax strategies, such as charitable trusts, gifts, intergenerational plans, and real estate transactions.
Tax Challenges and Opportunities
Wealthy individuals don’t just want to rip off Uncle Sam and keep more money for themselves. We’ve found that high-net-worth individuals frequently invest in their communities, care about their families, and are involved with philanthropic endeavors. However, they want to maintain more control over their money and use their wealth in ways that matter to them.
This presents both a challenge and an opportunity for tax planners. There are several ways to defer and reduce taxes while contributing to charities, gifting money and assets, and passing your wealth on to your heirs. However, managing the complexity of multiple tax strategies requires customized and specialized tax knowledge and expertise. For example, there are times when one solution may compete with or undermine another. Estate tax planning for high-net-worth individuals may utilize some of the following tax strategies:
Charitable Trusts
Charitable trusts can be a valuable way for high-net-worth individuals to contribute to causes they care about while reducing their tax burden and even providing a continuous tax-free income stream. There are various ways to structure charitable trusts depending on your unique financial situation. Someone with $5 million in assets will have dramatically different needs than someone with $50 million. Still, both can benefit from creating charitable trusts with the help of a tax advisor.
Gifting Strategies
Gifting strategies allow wealthy individuals to move some of their assets out of their taxable estate while giving their children and grandchildren an “advance” on their inheritance. Gifting strategies are most effective when spread out over several years and in coordination with other estate planning and tax strategies.
The annual gift tax exclusion allows each individual to give up to $17,000 per year per person for unlimited people. As long as it fits within these requirements, that money will not be subject to income or capital gains taxes.
Estate Planning
There are frequent political proposals to lower the threshold for “death taxes” to $3.5 million from its current high threshold of $13.6 million. If you have an estate worth over $3 million, you should seriously and urgently consider working with a tax professional to set up your estate so that your children and grandchildren get the most benefit possible.
High-net-worth individuals have always understood that the secret of advanced tax planning is to retain control over your assets and how they are used while transferring ownership. There are a variety of irrevocable trusts that will allow you to do this, reducing your and your beneficiaries’ taxes, including family limited partnerships (FLP) and family LLCs.
Deferred Sales Trusts
Deferred Sales Trusts are a powerful way for high-net-worth individuals to continue expanding their wealth while deferring taxes. They can be employed strategically, along with charitable trusts and family LLCs, to spread a capital gains tax burden out over time and maximize returns on future investments.
As a high-net-worth individual, you want to maximize the impact of your wealth. You want more money to give and a more considerable legacy to pass on to your children and grandchildren. A Deferred Sales Trust allows you to reinvest gains from selling an asset before paying taxes, increasing your ability to invest and grow your wealth.
A Deferred Sales Trust is a powerful tool in long-term advanced tax planning, especially when used in conjunction with other tax strategies. However, it is not well-known by many financial advisors and tax planners. If you think a Deferred Sales Trust could be a valuable part of your overall tax planning, contact a qualified Deferred Sales Trust trustee.