Often I’m asked what problems I most often see in consulting with high net worth individuals to manage their personal wealth. It’s hard to know where to start, but here’s my “short list.” (Image Credit: FreePix/Pixabay)
It’s been said “you’re rich when you know you have enough.” So determining the cost of a lifestyle and the capital required to sustain it is a worthwhile undertaking. The outcome can be both sobering and liberating. During the financial crisis, many who thought they had enough discovered they didn’t, owing to excessive leverage, lack of diversification, inadequate liquidity, or merely an out of control lifestyle. Consider the sense of security in knowing that you have enough and the liberation of being able to dedicate your wealth to helping others – family, friends and community.
Most wealthy people are self-made, crediting hard work and risk-taking for their success. Yet they foster a “shirtsleeves to shirtsleeves in three generations” outcome by providing their children and grandchildren an entitlement through their estate plan rather than incentives and opportunities. Early distributions, often with the beneficiary serving as their own trustee, for “health, education, maintenance and support” are hardly an incentive or reward for productive activities. Outright distributions can worsen the matter, not to mention the resulting exposure to creditors, judgements, financial mis-management, divorce and taxation. Instead, consider holding assets in trust, providing discretionary distributions with an independent trustee, or distribution committee.
The clock is ticking on the expiration of the increased gift and estate tax exemption under the Tax Cuts and Jobs Act of 2017, set to occur at the stroke of midnight December 31, 2025. The exemption was effectively doubled, and with inflation adjustment now stands at $11.4 million: $22.8 million per couple. And depending on the outcome on next year’s election, a new administration is likely to attempt to repeal it as part of its “first 100 days” legislative agenda. So you have little over a year to either die or make gifts to capture the increase. Assuming you prefer the gift scenario, creation of a trust into which you gift assets would allow you to capture the increase. Enhanced by applicable valuation discounts and sale of additional assets for an installment note, you could shift millions out of your estate. Those assets may also avoid the reach of the proposed (and ill-conceived) “wealth tax.”
We often think of the importance of teaching and reinforcing strong values in our parenting. Have you instilled the value of generosity and charity through involving your children and grandchildren in your philanthropic activities? They can also learn the value of accountability if your charitable activities are properly structured.
Show them how to select organizations run like a business, with good leadership, efficient operations, and a track record of results. Favor projects where your gift can have the greatest leverage to achieve an outcome or attract other gifts. Your charitable legacy could either be a single foundation in which your children and grandchildren can collaborate in their gift-giving or a separate foundation or donor advised fund for each.
Investment portfolios are often poorly-designed and managed. Here’s but a few of the common issues. A rational person would never, knowingly, assume uncompensated risk. Yet that is precisely what a poorly diversified portfolio produces. Most active managers under-perform their benchmark; do yours? Despite the sex-appeal of private equity and real estate, better returns, for lower cost, better transparency and increased liquidity can often be achieved with publicly-traded securities. Income taxes can take a toll on returns. Is your portfolio’s tax exposure being actively managed and coordinated with gains and losses you may have in your other assets? Your societal concerns can be reflected by screening investments for Environmental, Societal and Governance (“ESG”) considerations.
Finally, wealth assets held in a revocable, irrevocable or charitable trusts or corporation may each have different purposes, holding periods and income tax status and hence should be appropriately designed and governed by a written Investment Policy Statement.
And finally, with the end of the year upon us, it’s time for some last minute income tax planning. With bitter memories of last year’s levy fresh in our minds, following is a list of strategies that may ease the burden of next year’s tax bill. First and most obvious, make sure that your withholding and quarterly estimates are adequate to reduce interest and penalties.
Defer salary and bonus to next year. More small businesses can use the cash versus accrual method of accounting than could do so previously. This can facilitate deferral. Make charitable donations. A private foundation or donor advised fund can accommodate substantial contributions this year (subject to deductibility limits), with distributions taking place in later years. Set up a pension plan for your consulting income or director’s fees.
Make business investments that qualify for the liberalized business property expensing option of $1,020,000. Businesses can also claim a 100% bonus first year depreciation for machinery and equipment. Defer capital gains by rolling them into a Qualified Opportunity Zone Fund. Insure your broker is doing tax loss harvesting in your investment portfolio. Buy an oil well. Then get going early next year in developing a strategy to reduce future year’s tax bills. Perhaps move to Texas (no state income tax), and buy a truck.
Richard P. Rojeck (Pictured Above) has over 35 years of experience in developing and helping implement comprehensive financial plans that integrate financial independence analysis, estate, wealth and business succession planning, investment and risk management, and more. He has earned the CERTIFIED FINANCIAL PLANNER™ professional certification and the Accredited Investment Fiduciary designation. He is the former chair of the CFP Board of Standards, the standards setting and certifying body for CERTIFIED FINANCIAL PLANNER™ professionals.
Rich is the author of Wealth: The Ultra-High Net Worth Guide to Growing and Protecting Assets, published by Palgrave MacMillan. It is available at Diesel, A Bookstore and through Palgrave MacMillan, Amazon, and Barnes & Noble.
Rich Rojeck a registered representative of Lincoln Financial Advisors a broker/dealer (Member SIPC) and a registered investment advisor. Lincoln Financial Advisors does not provide legal or tax advice. Use of the AIF designation does not indicate that Lincoln Financial Advisors Corp. (LFA) is necessarily acting in fiduciary capacity under federal, state or other applicable law as it relates to the services provided to you and your account. CRN-2845582-112519