6 Strategies to Protect Ultra-High-Net-Worth Family Wealth

The term ultra-high-net-worth invokes a sense of financial security. Possessing such high amounts of wealth gives most people relief and confidence in leading a financially sound and comfortable life. Typically, an ultra-high-net-worth individual is someone with a financial standing of at least $30 million or more. This could be either in liquid or illiquid assets and include cash, mutual fund investments, shares, real estate, gold, and more. Some popularly known ultra-high-net-worth individuals include Amazon’s founder, Jeff Bezos, business magnate and investor, Warren Buffett, Meta’s founder, Mark Zuckerberg, co-founder of Microsoft, Bill Gates, etc. ultra-high-net-worth families differ from high net worth families. The latter can be described as someone who owns liquid assets, in particular, of at least $1 million or more. It is important to note that this is an important distinction as most banks and wealth management firms take this into consideration when offering services or working with individuals.

An ultra-high-net-worth family can own various types of assets like businesses, collectibles, jewelry, property, yachts, private airplanes, etc. According to the 2021 Wealth X World Ultra Wealth Report, the United States is home to the highest number of ultra-high-net-worth individuals in the world. Most of these are settled in San Jose. Approximately 40% of all ultra-high-net-worth individuals in the United States are self-made and have businesses of their own. Moreover, 27% of these individuals hold at least 20% of their assets in real estate. And, while this may give the illusion of a successful life, it can only continue to be so if such a family’s wealth is protected. To do so, consulting a wealth manager may be the apt course of action for a family having a high net worth. These families may lead exceedingly serpentine lives, owing to their vast assets, inheritance issues, public scrutiny, and more.

Keep reading to find out more about the problems faced by ultra-high-net-worth families and the right family wealth strategies that can help solve them.

What are the problems faced by ultra-high-net-worth families?                                                                             

1. Cyber security:

In the present day and age, where technology has penetrated every aspect of human lives, cyber security threats are a common concern. This threat is further magnified for ultra-high-net-worth families. With the constant public attention and media tracking their every move, it can be hard to protect their personal information. Ultra-high-net-worth families also have a lot of confidential data that needs to be safeguarded. Mobile phones, computer systems, as well as security systems can be hacked. Therefore, it is important to ensure encryption at all levels. Cyber threat insurance can also be vital for some individuals and families.

2. Estate planning:

Estate planning is crucial for every individual irrespective of their wealth or possessions. But the need for it is substantially increased in the case of ultra high net individuals. The stakes are a lot higher when such a large sum of wealth is involved. When taxes and personal dynamics get combined, the situation can further spiral out of control. One of the biggest concerns for ultra-high-net-worth individuals can be the transfer of their estate to its rightful heirs. As of 2021, an estate valued up to $11.7 million is exempt from estate tax. However, given the fact that ultra-high-net-worth families have an estate of $30 million or more, a high amount of money is still taxed. The government levies a flat 40% tax for an estate valued over $11.7 million in 2021. But this is not all. Some states also levy state and inheritance tax that can further reduce the size of the estate. However, there are some estate planning family wealth strategies that can be employed to lower the taxability.

3. Maintaining lifestyle by liquidating assets:

Ultra-high-net-worth individuals may own several assets that can contribute to their large estate. However, not all of this wealth lies in their bank accounts. Most of these assets are illiquid. This can be money invested in shares, employed in businesses, or real estate plots and jewelry. Managing this wealth, liquidating this smartly, using it for retirement, maintaining everyday lifestyles, and catering to basic needs and wants can require optimal money management skills.

4. Wealth protection:

Protecting wealth is a major cause of concern for most ultra-high-net-worth families. With large amounts of money comes great responsibility and risk. These individuals take massive risks to build their wealth. This risk can turn the tables anytime. They rely on aggressive high risk investment instruments. Investment options for high net worth individuals can include options like direct equity, crypto currencies, and more. Any political, economic, or global event can result in a massive loss for them. It was found in 2009, after the great recession, a lot of ultra-high-net-worth individuals lost their fortunes and the status of being an ultra-high-net-worth person. Hence, it is crucial for these individuals to be vigilant at all times. Any situation can spiral into debt, poor credit scores, and ultimately lead to their downfall.

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What investing strategies can help ultra-high-net-worth families protect their wealth?

Here are some investing strategies for the high net worth investor that can help mitigate the issues mentioned above and several others and help high net worth families protect their wealth:

1. Having a concrete financial plan in place:

Financial planning is essential for anybody who wishes to have enough wealth. However, in the case of ultra-high-net-worth families, financial planning is of higher import. Financial planning for these families includes a wide range of complex strategies for retirement, debt management, tax planning, estate planning, succession planning, and more. For average income groups, the primary source of income is their salaries from a job or profits from a business. However, ultra-high-net-worth individuals have multiple income sources. These can include profits from several businesses, capital gains from investments, money from the sale of properties, profits from the share market, and more. Managing all of these incomes and using them optimally to create more wealth, sustain an extraordinary lifestyle, and maintain philanthropic endeavors can be an intricate job. Moreover, when you take into account the entire family, things can get more complicated. A nuclear family consisting of two partners and two children can have various outflows of money. Education expenses, lifestyle expenses, travel expenses of different members of the family need to be aligned together to ascertain how much money is going out versus what is coming in. These need to be aligned with the family’s financial goals and personal principles to ensure that the wealth accumulated till now is able to last the future generations optimally and the family’s financial status and reputation are maintained. All of this can only be achieved with adequate wealth management and comprehensive financial planning.

2. Managing taxes to lower their outflow:

It is said that the higher the income, the higher the taxes. Taxes constitute a major part of an ultra-high-net-worth individual’s estate. Right from income tax to capital gains and estate taxes, there are several tax liabilities to deal with. Without adequate tax planning, the burden of paying the tax is not just limited to the individual themselves but also the family members who inherit the estate. Therefore, ultra-high-net-worth families must employ tax saving strategies like charity, gifting, setting up trusts, etc., to protect their wealth. As stated above, an individual can pass on assets up to $11.7 million to their heirs tax-free as of 2021. This may be a low limit for ultra-high-net-worth individuals. However, there is another way to increase the limit. As of 2021, married couples can pass on assets up to $23.4 million without paying federal estate tax. So, a joint estate can help reduce taxes levied on the heirs to a large extent. The flat tax rate of 40% will then be levied on the remaining estate only. As of 2021, gifts of up to $15,000 in a financial year are also exempt from federal gift tax. Where a person lives and settles also determines their tax liabilities. For instance, Maryland charges inheritance tax as well as the estate tax. However, Massachusetts, Rhode Island, Washington, and New York levy the estate tax only. States like New Jersey, Nebraska, Vermont, and Connecticut charge state tax.

In addition to this, trusts and limited liability companies (LLCs) also help lower the costs borne by inheritors or children. Trusts are also useful to ensure that the heirs receive their share. This can be essential in the case of step children, children from more than one marriage, minors or disabled children, etc. Moreover, trusts also help to control how and when the beneficiary can use the wealth.

High net worth individuals can also pass on their wealth to lower income relatives whose income tax bracket is lower than theirs. This will subsequently lower the tax liability too. Another way to reduce or save on tax is by purchasing a life insurance policy. The proceeds from a life insurance plan are exempt from paying taxes. This helps the family to avail of tax benefits and, at the same time, use the wealth to their benefit.

3. Hiring a wealth manager:

High value estates require professional management, and wealth managers can provide that. Professional wealth managers can help ultra high net families manage their investments, plan their estate and business succession, mitigate risk, handle lawsuits, and more. These individuals may also require more than one wealth manager, depending on the services they are seeking. Moreover, hiring a wealth manager who is also a fiduciary advisor may also be advised. Fiduciaries have a legal duty to put the client’s interest above their own. This can be essential in the case of wealthy individuals who may have millions of dollars at stake.

4. Managing risk optimally:

Investments for high net worth individuals generally carry high risk. In order to create such high amounts of wealth, ultra-high-net-worth individuals also make high bets. Market volatility can be a cause of concern here but it can also be avoided by keeping a well-diversified blend of different investment options. Capital appreciation is important for most investors, but after having amassed a certain level of wealth, capital preservation requires equal focus and attention. The answer to what high net worth individuals invest in can range from equity funds, foreign stocks to real estate, start ups, and crypto currencies etc. But, as important as it may seem to invest in these instruments, it is also crucial to diversify the portfolio with bonds, certificates of deposits, etc. Diversification across asset assets, geographical boundaries, and sectors can help lower risk and also yield higher returns. A well-diversified portfolio is essential for any investor regardless of their net worth as it helps to mitigate risk.

In addition to this, ultra-high-net-worth families also face other types of risks like cyber security threats, risk of lawsuits, breach of confidential information, invasion of privacy, etc. Insurance can help protect against these factors. For instance, liability insurance can help in the case of lawsuits. Businesses under threat of cyber security and a security breach can be drawn into legal issues and lawsuits by customers. Liability insurance offers protection from the legal costs borne out of such situations. Cyber security insurance offers financial protection against the losses borne due to a cyber attack, including theft of client or business information, hacking, etc. There are also several other types of insurance plans that can help ultra-high-net-worth individuals. Life insurance plans, as stated above, are a great way to reduce taxes. They are also helpful in providing financial security to the family in case of an unfortunate event. It is easy for individuals with a high net worth to get insurance plans of exorbitant values. Hence, taking advantage of this can be crucial and highly recommended. Furthermore, health insurance like critical illness insurance, long term care insurance, permanent disability insurance, etc. is also equally necessary.

5. Drafting a proper estate plan:

Even minus the taxes, estate planning can be crucial to maintain peace and harmony in a family. Ultra-high-net-worth families can have multiple disputable assets like vacation homes, luxury cars, businesses, collectibles and antiques, jewelry, Non Fungible Tokens (NFTs), etc. The division of these assets can lead to feuds between the family members. Business succession planning can also create similar situations of unrest between the family members. Hence, estate planning is essential for ultra-high-net-worth individuals. It may help for the head of the family to discuss the estate with all the heirs. Seeking out what each member of the family wishes to have can help simplify crucial decisions. The same prudence can be applied in the case of business succession as well. Ultra-high-net-worth families can have multiple businesses – big and small. The transfer of these businesses can be a complex process depending on who the business is transferred to. For instance, is the business being transferred to a child or a grandfather or is the business being transferred to an existing partner. In some cases, the business may also be transferred to an employee or shareholder. All the parties concerned must be in agreement with the decision being made. Otherwise, the will of the owner can be contested in court and go through the expensive and time-consuming process of probate.

6. Ensuring financial literacy and money management skills among heirs:

Ultra-high-net-worth individuals spend the majority of their lives working hard and creating wealth. However, in many cases, the family members who inherit this wealth lack the foresight to maintain its value and grow it further. Equipping the surviving family members like the children and grandchildren requires time and effort and should ideally start from a young age. Something as simple as offering the children a tight budget when they are young and encouraging them to study and work hard can be instrumental in shaping them. It may be advised to motivate the younger generations to earn their own wealth before they can inherit their share of the large estate. This forces them to value money and use it effectively. Charitable donations also help children imbibe social responsibility and contribute to society. In the case of a business, ultra-high-net-worth individuals can ensure that the successors understand the core principles of the business and are willing to abide by them and reflect them in their work. This can ensure that the family maintains its status of being in the ultra-high-net-worth bracket.

To conclude

The lives of ultra-high-net-worth individuals may seem glamorous on the outside but can be extremely complex on the inside. The glaring media attention, social responsibility, and surrounding threats like thefts, security attacks, and more can make things hard to manage. This is why ultra-high-net-worth families require several family wealth strategies to protect their assets. This can be an ongoing task and require prudent planning at all times. While the strategies mentioned above can help, it can also be beneficial to hire a wealth manager. Professionals can gauge situations better and offer practical solutions to problems. Wealth managers streamline all financial affairs and reduce the time and effort spent in mitigating risk. They can recommend the right investments for high net worth individuals and help them achieve their goals of not just capital appreciation but also capital preservation.

If you are a high net worth individual looking for assistance in managing your wealth, use WiserAdvisor’s free advisor match service to find highly qualified and vetted wealth managers. Answer a few questions about yourself and get matched with 1-3 fiduciary advisors that are suited to meet your financial requirements.