Common Challenges Faced in High-Net-Worth Estate Planning

The typical notion of succeeding in life is by earning more money. Most people spend their entire lives chasing after money-making opportunities, working hard, saving and investing to amass a bigger corpus. Whether it is school or college, the end goal is normally to land up in a high paying job and be rich. Money is also seen as a solution to many problems. Having adequate funds can ensure that you lead a comfortable life, have enough to take care of your loved ones, and can cover financial emergencies, among other things. A hefty bank account can ensure that you can get access to the right medical services, your children attend college, and more.

Even though money is a solution to many problems, it can sometimes be problematic too. The richer you get, the tougher it can be to manage your finances. Money management for high-net-worth clients can be particularly hard. A professional financial advisor can help you to make informed estate planning decisions now and in the future. The high taxes, the enormous size of the estate, the number of heirs, the division of assets, etc., can be confusing. If you are a high net worth client, you may have faced some estate planning challenges or are likely to encounter them in the future. If not planned well, these challenges can cost your heirs high taxes and fees, and reduce the value of their inheritance.

Read on to know some common challenges faced in high net-worth estate planning and how you can avoid them.

Who are high-net-worth individuals?

Before you proceed to know the challenges faced by high-net-worth individuals while planning their estates, you must know who these individuals are and whether or not you fall in the same category. High net worth individuals are people who have assets (cash, cash equivalents, and other assets) amounting to at least $30 million or more. High-net-worth individuals are among the wealthiest people in the world.

What are the challenges that most high-net-worth individuals encounter with their estate planning?

Here are some issues that high-net-worth people face with estate planning:

1. Not being up to date with their estate plans:

The wealthier you get, the more complicated it gets to manage your finances. For an average investor, the inflow and outflow of money can be more or less the same over time. Their financial standing does not change drastically. Hence, they do not need to revisit their wills every now then. In most cases, these individuals are recommended to redo their wills and estate plans when they cross major milestones or experience a life changing event. These can include marriage, divorce, the birth of a child, adopting a child, losing a family member, etc. The biggest mistake that many high-net-worth individuals make is to follow the same frequency of revaluating their estate plans as low or moderate net-worth people. However, high-net-worth individuals cannot adopt the same strategy or frequency. The wealth of a high net worth person can change considerably in a matter of just a few months or years. Their assets can increase, their business income can alter, and their expenses can double in just a few months. This calls for the need to reassess the will and other estate plans every now and then. While it can be a little cumbersome to update your will every few months, you have to be mindful to include your assets as and when you gain them and ensure that they rightfully reflected in your estate plan.

2. Passing down the family business:

As a high-net-worth individual running a family business, it becomes extremely crucial to plan your business’s successor after you. Business succession is an important part of estate planning for high-net-worth individuals since most of the people who fall in this category draw their income from their businesses. The proper functioning of these businesses in their absence is crucial to keep the company and legacy running. While the most obvious choice is to simply pass it down to your children, it can benefit you to dig a little deeper before you take this step. Assuming that your children will take over the reins of your business can be detrimental to your company’s legacy. Instead, try to find out your children’s interests and willingness to take over your business. Not all of your children would be keen to carry on in your footsteps. Some can have other career plans too. It helps to talk to your children and distribute your assets in line with their interests and preferences.

Succession planning is a key component of estate planning and it does not have to be limited to your spouse or children. In the case of big enterprises, you can also choose employees from within the company that show promise. It is important to act in the best interest of the company and this decision should be made on the basis of skills, qualifications, and talent. Hence, try to keep an open mind here.

3. Underestimating estate taxes:

High-net-worth individuals may not always think as much about their cash outflows compared to other individuals. Taxes have far deeper consequences on low and moderate net worth people as they own very limited income in the first place. If they add tax to this limited wealth, they are left with even less money in their hands. High net worth people, on the other hand, can be deceived by taxes. Their tax output is undoubtedly high, but because their income sources are so diverse and rewarding they tend to overlook the impact of taxes on their estate. However, it is essential to note the repercussions of capital gains tax, estate tax, inheritance tax, etc. on your estate. Your assets are likely to be distributed among several of your heirs. This translates to one large estate being divided into several smaller ones. The value of each portion is bound to be lower than the original estate you owned. If you add taxes to this, the value of each inheritance will be further reduced. Hence, high net worth individuals should focus on tax saving strategies at the time of estate planning with greater detail and adopt different tax saving strategies, such as donations, gifts, etc.

Trusts are also a great way to reduce taxes. If you establish a trust, you eliminate the need for a probate. This way, you save on probate costs as well as lower your tax liability. Trusts also help you put restrictions on how and when the inheritor can use their money. This can be great in the case of minors or troubled heirs who are likely to misuse money. Another useful way to pass on your assets to your family can be through a limited liability company (LLC). If you open an LLC, you will be able to retain the management of all your assets till you are alive. You can add your spouse, children, or grandchildren as shareholders in the LLC. After you, the assets will simply be passed down to your heirs, but with a lower tax liability. Taxes on assets held in an LLC are significantly lower. Moreover, all states offer this option. But the rules can differ for each state, so it may be advised to discuss this option with a wealth manager.

4. Hiring multiple financial advisors for separate assets:

Because of the large estate size, many high-net-worth clients end up hiring separate financial advisors for separate assets. For instance, one financial advisor would be in charge of your business, the other for your domestic real estate assets, a third for your global investments, etc. Although the size of an estate can sometimes require more than one professional to effectively manage it, this can also create a challenge. The more people you get involved with, the higher can be the risk as no two people are likely to act in the same manner. Hence, while hiring more than one financial advisor can be beneficial, it is essential that these professionals work as a team and are well versed with the decisions taken by others. This will eliminate risk from your estate plan and ensure that your views are streamlined and rightfully conveyed in your will.

5. Picking the right trustee for your will:

As a high-net-worth client, your estate planning needs are more diverse than others. High net worth clients do not just hold assets like a retirement fund or a savings account. Instead, they own collectibles, vintage cars, real estate properties, private jets, crypto currencies, precious metals, and more. Sometimes, the value and size of such assets can lead to jealousy, greed, and selfishness among heirs. This is why picking a trustee or executor for your will is critical. However, picking the ideal trustee or executor for a will can be a lot harder for high-net-worth individuals, given everything that is at stake. A trustee’s role is a difficult one. This person is in charge of crucial decisions in your absence and should therefore be completely unbiased with no vested interests of their own. Picking a child or relative can backfire here as they might act out of bias or bring personal judgments into the picture. A professional, on the other hand, can be more impartial and neutral. No matter what you decide, keep in mind that it helps to discuss these things with your family members first.

Must Read: What is Liquid Net Worth and How to Calculate It?

To sum it up

Estate planning can be a long drawn process for high net worth people. While most people draft a will and sit on it for many years, a high net worth person must revisit it from time to time to ensure that it is up to date with their current needs and directions. Keep in mind that a large number of tangible and intangible assets can be cumbersome to include in your estate sometimes, but it is your hard-earned money and you should do everything in your power to ensure that it reaches the right owner after you instead of being wasted in taxes.

If you need help in high-net-worth estate planning, you can reach out to a professional financial advisor in your area to draft an estate plan to protect yourself, your family and your wealth for years to come.