For those who have strived hard to get ahead for decades, it may seem hard for they themselves to believe. Their family has achieved the status of “ultra-high net worth” – or investable assets valued at more than $30 million. They have left the common man in the dust and have virtually nothing in common with the day-today financial concerns of the middle class, or even the upper middle class.
Thinking about now-mundane items, such as balancing monthly payments on two or even three cars, or the challenges of meeting the mortgage on a new and more expensive home is essentially a waste of time.
But make no mistake — the rich still have financial concerns that must be managed properly to successfully maintain a high standard of living and sustain their riches across multiple generations. They must effectively deal with changing tax codes, proper estate planning, the best use of investment vehicles, and often the management of multiple properties. There are times, such as the housing bust a few years ago, when this last point, in particular, is not all it’s cracked up to be.
Fact is, the heads of most ultra-high net worth families do not ultimately do it right. Statistics show only a 30% chance that their wealth will last through their grandchildren’s generation.
So what steps should they follow to buck the odds of failure and preserve, if not increase, their wealth? Here are 11 suggestions.
• Most important, make sure you enact family governance. Everyone has different values about money and how they prefer to communicate about it with their heirs, Ultra-high net worth families cannot simply hope their heirs will ultimately figure everything out. Rich people who fail to create a strong family governance structure — one including a clear mission and specific goals – are asking for big trouble. Crystal clear communication is also imperative.
• Do comprehensive financial planning. Above-average assets require above-average financial planning. In addition to management of cash and debt and investment planning, this includes taxes, estate planning, financial forecasting, sophisticated risk management, and a defined plan of action.
• Diversify your investments, but also consolidate them when possible. Ultra-high net worth folks often set up the same type of investment accounts with multiple financial institutions in the belief that this is an effective way to reduce risk. But diversification is about how your money is invested, not where it is kept. Establishing multiple same-type investment accounts can actually have an adverse effect, such as higher costs and more complex retirement planning. Keeping track of your investments also becomes harder.
• Utilize non-traditional strategies as a portion of your portfolio. This further diversifies your assets, providing a greater level of safety and potentially a higher rate of return. These include venture capital, alternative investments, private equity and annuities. Venture capital invests in early-stage companies with tremendous upside growth potential for those with a long investment horizon. Alternative investments are often connected to hard assets. These can be a diverse array of real estate offerings or land development deals or investments in business development companies. Private equity focuses on the pooling of investors’ funds into private funds that lend companies money at high rates or take public companies private, striving to restructure them to make them more profitable. Annuities are insurance products that typically guarantee income for a period of time or life.
• Make risk management a high priority. One major and very common risk, of course, is stock market volatility. Inevitable volatility should be dampened with accompanying investments in much less volatile bonds. Real estate investments can be diversified by industry and geographic location. Also take into account the risk of lawsuits, especially against a business you own, and the risk of losing income due to serious illness or a disability. This risk can be mitigated by the purchase of long-term care or critical illness insurance.
• Also plan ahead for the most severe risks of all – so-called life-degrading events. In addition to lawsuits, disabilities and life-altering injuries and sudden market meltdowns, these include cybersecurity incidents and natural disasters impacting your estate, such as irreplaceable collector’s items. Protective steps include establishing trusts, including living trusts, for your closest heirs, diversifying assets and rebalancing them as much as possible, and updating your wealth management plan quarterly.
• Use surplus assets effectively. 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. (Dividend and interest income will still be attributed to you.) If they are adults, they have to pay the taxes on asset-generated income, but, again, at a significantly lower rate. You yourself can avoid capital gains tax on surplus assets by donating publicly-traded securities that have increased in value to qualified charitable organizations.
• Instill financial responsibility in your children. Self-made individuals are hard workers acutely aware of the true value of money, but their children have grown up in a privileged environment and may not be. If wealth is to last across multiple generations, they must be taught the importance of financial responsibility. This can be done by giving children a reasonable allowance and instructing them to divide it into expenses, savings and charity. Also effective is establishing a monthly budget that can cover the reasonable expenses and activities of the entire family. If your children ask for something that exceeds the budget, tell them you will consider it next month.
• Consider splitting family income. In the U.S., the higher the income, the higher the amount you owe in taxes. By splitting the income between members of the family – especially low-income members – ultra-high net worth families can save money.
• Plan for business succession. If you plan to pass on your business to your children or grandchildren, determine who has the ability and the interest to lead your business. After you have targeted a successor, gradually start involving them in business matters. Then slowly ease them into a role of responsibility in coming years. As part of the succession plan, make sure you also incorporate appropriate strategies and steps, such as individual pension plans, an estate freeze of minimizing taxes, and buy insurance to protect against risks and unforeseen events. Also include a shareholder’s agreement.
• Lastly, put vacation property planning on your to-do list. Ownership of a vacation property can be the cause of a variety of family-related issues. A big concern is passing along the property to the next generation without creating conflict. With the right planning, you can reduce taxes as well as pass along the property in a harmonious way.