When a client complains about paying taxes, I gently remind them that it is a good problem, considering the alternative. While wealth comes in many forms, for the purposes of this column we are talking about financial wealth.
There’s no quick definition of what it means to be wealthy, and there are many measurements of what constitutes a wealthy individual. One common measurement is to have investable assets of $2 million or more or a total net worth of $5 million or more and an annual household income of $150,000 or more. However, even some of those who fall into this category do not necessarily see themselves as wealthy. That said, the more assets you have, the more complicated your choices about money become.
Financial wealth comes from many sources; it may come from family members (inheritance or family farm), fame (movie star), sports (ball players) or random luck (technology investments or lottery). That said, the vast majority of wealth is self-made coming from years of hard work. Regardless of the source, it is a tremendous responsibility to manage significant wealth and it comes with its own burdens. Regardless of how much wealth you manage, if you find yourself in the above loose definition of the wealthy category, the following are areas of financial planning that may be helpful to consider.
1. Get Good Tax Planning Assistance: Albert Einstein said, “The hardest thing in the world to understand is income taxes.” Working with a tax professional will save you a hundred times over any fees you may pay for advice and planning. Your tax professional can help manage tax liabilities, help with decisions on when to sell appreciated real estate and investments for greater tax efficiency, help with alternative minimum tax planning, assess tax impacts of charitable giving, review tax implications of retirement plan distributions, provide advice on the tax effects to trust and estate activities, and more.
2. Get Good Legal Advice: There are a number of strategies that can improve the distribution of wealth both during life and after passing. A primary goal is often to minimize taxes; with good legal and accounting advice you can implement a number of strategies to reduce Uncle Sam’s share of your estate. A good legal review will insure all is in order. It is also advisable to plan for management of financial affairs in the event of disability or incapacity.
3. Get Good Investment Guidance: With the multitude of investment options available and the media telling you one thing today, another tomorrow, it can be hard to know where to begin. Financial advisors can help you cut through the masses and help you determine investment choices. They listen to your needs, wants and goals and help you formulate a plan that includes assessing risk tolerance, establishing asset allocation and diversification, providing oversight and monitoring, and more.
4. Get Good Retirement Planning Assistance: The world of retirement plans is vast and complex. Knowing what types of accounts to establish, when and from where to take distributions, insuring IRS requirements are met, calculating appropriate distribution amounts, assessing distributions of net unrealized appreciation of company stock, the best time and approach to taking Social Security benefits – the list goes on. Legal and investment advice can be beneficial to enlist the service of a retirement planning professional.
5. Look at Risk Management: Wealth creates a different set of liability issues. Insurance can offer many strategies, for example malpractice insurance, errors and omissions insurance, and director’s and officer’s insurance. As a rule, all wealthy individuals will have some form of general liability insurance (umbrella policy) to protect assets not covered by other insurance. A good insurance professional will help you review, update and monitor your policies. A good legal professional will help address other methods of risk management such as the use of Family Limited Trusts, domestic trusts and business entities. A good investment professional will help you with portfolio risk management.
6. Consider Family Governance: You may want to consider developing a family mission statement; this would address values and goals that family members and advisors can use as a guideline when making financial decisions. If you have a family business you will want to look at a family succession plan. When it comes to family wealth, you want to run it like a business: keep financial records, be mindful of confidentiality issues and engage in regular family meetings.
7. Consider Charitable Solutions: Whatever your passion, whatever touches your heart, there is a well run, charitable organization out there that would be grateful for your gift. The charity, along with help from your tax, legal and financial professionals, can help you make smart choices that can make differences in our community and around the world.
Clearly there are many areas to cover with each having their own ever-changing rules and regulations. There is great value in working with advisors who specialize in their respective fields. Changing tax and regulatory environments, volatile stock markets, and uncertain economic climates increase the need for high-level, integrated advice. Integrated wealth management involves coordinating all of the varied, yet interconnected, areas of your financial life.
This list is meant to provide food for thought and serve as a guide as you navigate the increasingly complex world of financial planning needs. Again, wealth is a good problem.
