Fortifying Wealth: Advanced Tax Strategies for High-Net-Worth Individuals

A high-net-worth individual (HNWI) is someone with a significant amount of liquid assets, typically at least USD 1 million. This excludes your primary residence, cars, or other belongings and focuses on quickly convertible investments and cash. Usually, this type of client is a high priority for big Investment Banks or Financial Institutions, but they provide those with solutions for their needs? For example: What about Tax Planning? 

Usually, this people need help with two focus points:

• Reducing their Tax Burden with effective Tax Planning
• Help to build a path for their legacy to their loved ones

That is why the focus of this blog will be on some strategies to optimize those two points:

1) Using tax-advantaged accounts to reduce taxable income:

For high-net-worth individuals (HNWIs), managing their tax burden becomes critical to wealth preservation. Tax-advantaged accounts offer a powerful tool to reduce taxable income and accelerate wealth accumulation. This is how it works:

• Lowering the Tax Bill Today:  Many tax-advantaged accounts allow contributions in pre-tax dollars. This means the money deducted from your paycheck to fund these accounts lowers your taxable income for the current year. The result: a smaller tax bill now.

• Tax-Deferred Growth:  The beauty of these accounts doesn’t stop there.  The investments within them typically grow on a tax-deferred basis. Any capital gains or interest earned inside the account are not taxed until you withdraw the funds. This allows for powerful compounding effects as your wealth grows faster due to the taxman taking a smaller bite.

2) Charitable Contributions, a Win-Win for High-Net-Worth Individuals and Worthy Causes:

High-net-worth individuals (HNWIs) are often passionate about giving back to society. Fortunately, their charitable endeavors can be coupled with innovative tax strategies, creating a win-win situation. Some of the ways this could work are the following:

• Direct Tax Deduction: Donating to qualified charitable organizations allows HNWIs to deduct the value of their contributions from their taxable income. This directly reduces their tax liability, offering significant savings depending on their tax bracket.

• Strategic Asset Selection:  Donating appreciated assets, like stocks or real estate held for over a year, can be particularly beneficial.  By donating the appreciated asset, HNWIs avoid paying capital gains taxes on the increase in value while still receiving a full tax deduction for the asset’s current fair market value.

HNWIs have various options for charitable giving, each with its own tax implications.  Some options include

1) Direct cash donations

2) Donating appreciated assets, and

3) Establishing a donor-advised fund.

3) Selling at a Loss for a Win, How Tax-Loss Harvesting Benefits HNWIs:

High-net-worth individuals (HNWIs) navigate a complex financial landscape, and managing capital gains taxes is crucial. Tax-loss harvesting emerges as a powerful tool in their arsenal, helping them reduce their taxable income and maximize their investment returns. Tax-loss harvesting involves strategically selling investments that have experienced a decline in value (showing a loss on paper).  This realized loss can then be used to offset capital gains from other holdings within the same tax year.

4) Choosing the Right Home for Your Assets:

Taxable vs. Tax-Advantaged Accounts:

What should be in each one? For high-net-worth individuals (HNWIs), optimizing their portfolio involves not just picking winning investments but also strategically placing them to minimize taxes. Here’s a breakdown of which assets are generally better suited for taxable accounts and tax-advantaged accounts:

• Tax-advantaged accounts will benefit you if you use them with Growth-Oriented Investments: Since contributions to these accounts may be tax-deductible and earnings grow tax-deferred or tax-free (depending on the account type), they are ideal for assets with high growth potential. It includes Stocks, Real Estate Investment Trusts, and Growth Index Funds.

• Taxable accounts will benefit you if you use them with Income-Producing Investments: While these generate taxable income. They might not be suitable for tax-advantaged accounts where tax-deferred growth is the primary benefit. Here, it includes Dividend-Paying Stocks, Bonds, and Short-Term Investments.

5) Navigating Wealth: How Trusts Benefit High-Net-Worth Individuals (HNWIs):

For high-net-worth individuals (HNWIs), managing their wealth involves not just accumulating assets but also ensuring their long-term security and distribution. Trusts emerge as powerful tools for HNWIs to achieve these goals. Types of Trusts for HNWIs:

• Revocable Living Trusts: These trusts allow HNWIs to retain control of assets while alive but ensure they pass to beneficiaries upon their passing, avoiding probate.

• Irrevocable Trusts: These trusts offer greater asset protection and tax benefits but relinquish control of the assets once transferred. There are various types of irrevocable trusts, each catering to specific needs.

Here’s how trusts can benefit HNWIs:

• Avoiding Probate: Probate is a lengthy court process that can be costly and public. Revocable living trusts can bypass probate, ensuring a smoother and more private transfer of assets to beneficiaries upon the HNWI’s passing.

• Minimizing Taxes: Certain trusts, like Grantor Retained Annuity Trusts (GRATs) and Irrevocable Life Insurance Trusts (ILITs), can effectively remove assets from the taxable estate, reducing the overall tax burden on heirs.

• Protecting Assets from Creditors: Irrevocable trusts can shield assets from future creditors or lawsuits, offering a layer of protection for the HNWI’s wealth.

• High-net-worth individuals (HNWIs) have unique financial needs that require specialized financial advisors. This is the most common type of financial advisor who can assist HNWIs:

• Certified Financial Planner (CFP):  This is a highly sought-after designation that signifies a professional who has met rigorous education, experience, and ethical standards. CFPs can provide comprehensive financial planning advice, including investment management, retirement planning, estate planning, tax planning, and risk management.

• For high-net-worth individuals (HNWIs), navigating the complexities of wealth management requires a skilled guide. Certified Financial Planners (CFPs) who charge by the hour offer a unique approach, providing a holistic service that tackles tax, estate, and retirement planning focusing on your specific needs.

The Advantage of Hourly Fee CFPs:

1. Customized Solutions: Unlike advisors with pre-packaged plans, hourly fee CFPs tailor their services to your unique circumstances. They take the time to understand your financial goals, risk tolerance, and family dynamics before crafting a personalized strategy.
2. Flexibility and Control: You have complete control over the scope of engagement. Need in-depth tax planning advice? Focus on that for a specific number of hours. Want a broader financial checkup? Structure your engagement accordingly, ensuring you only pay for needed services.
3. Ongoing Support: The hourly model fosters a long-term relationship with your CFP. They are available to answer questions, address life changes, and adapt your plan as needed, providing ongoing support for your financial journey.

The hourly fee structure fosters a transparent relationship between you and your CFP. 

You know precisely what you’re paying for and can adjust the engagement based on your needs.  This can be particularly beneficial for HNWIs with complex financial situations which require ongoing support and flexibility.

How can you find the right CFP for you?

Look for CFPs with experience working with HNWIs and a strong understanding of tax, estate, and retirement planning.  Seek someone whose investment philosophy aligns with your goals and who prioritizes clear communication.  Interview potential CFPs to ensure a good fit before starting your engagement.

By partnering with an hourly fee CFP, HNWIs gain a trusted advisor who can navigate the complexities of wealth management.  This holistic approach, combined with the flexibility of an hourly structure, empowers HNWIs to achieve their financial goals, secure their future, and leave a legacy.

If you’re looking for help making informed decisions about your money, hourly financial planning may be the right option for you.

Alonso Rodríguez Segarra – CERTIFIED FINANCIAL PLANNER™

Which provides hourly financial planning services, Fee-Only and Fiduciary. He has over 20 years of experience in the financial world and has been named among the Top 100 Financial Advisors in the US by Investopedia.

Note: The comments given in this guide are for educational purposes only. Before making a financial decision, you should consult with your financial advisor or conduct appropriate research. Remember that historical results are not a guarantee of future returns. This guide does not take into account tax impacts in the comments provided. Always consult your particular case with a specialist. We are not your financial advisor and remember that each case is different.

All rights to this guide are reserved, occasional mention of third-party brand names is made solely for educational and reference purposes, without any interest in financial gain. This information is for educational purposes only and does not represent an offer of products or services.