Financial planning can be complex as it is, but for high-net-worth individuals — generally, those with liquid assets of at least $1 million and a potential net worth of $5 million to $10 million — it can be even more challenging. Because it involves managing substantial and varied assets, additional tax complications, and sizable estates, high-net-worth financial planning requires a differentiated approach. Financial planning for high-net-worth individuals is about more than just goal-setting and investment advice — it involves comprehensive wealth management.
If you’re in the process of developing or revamping your high-net-worth wealth management strategy, it’s essential to be aware of the hurdles that you may encounter — as well as how best to overcome them. After all, the more you learn today, the stronger a foundation you can build for your financial future.
Top High-Net-Worth Financial Planning Challenges
1. Organizing Your Finances
If you’re like most high-net-worth individuals, your finances have a lot of moving parts. You might, for example, have multiple homes, stakes in several businesses, and a team of professionals who help you manage your wealth. It can be tough to keep track of it all, but doing so is an essential part of financial planning for high-net-worth individuals.
Without proper organization, it’s easy to lose track of investments, overlook liabilities, and miss opportunities for growth. This disorganization can lead to financial mismanagement, potentially resulting in financial losses and missed opportunities.
2. Distributing Your Wealth Efficiently
Wealth distribution is a critical aspect of wealth management for high-net-worth individuals, especially when considering succession planning and philanthropic endeavors. The challenge is ensuring that wealth is transferred smoothly and according to the individual’s wishes, whether it’s to heirs, charities, or other beneficiaries. Inefficient wealth distribution can lead to disputes among heirs, legal battles, and a significant portion of the estate being consumed by taxes and fees.
It’s natural to want to make sure that your loved ones are taken care of after you’re gone. But to ensure that you can pass along your wealth to your beneficiaries in the most tax-efficient way possible, you’ll need to strategize carefully.
3. Reducing Your Tax Liability
One of the greatest challenges of high-net-worth wealth management is increased tax liability. High-net-worth individuals face intricate tax regulations and significant liabilities, making it challenging to minimize tax burdens. Without effective tax planning, a large portion of wealth can be eroded by income, estate, and capital gains taxes.
But with the right tax-planning strategies, you can mitigate your tax burden and ensure more wealth is retained and available to meet your financial goals.
4. Choosing the Right Insurance
Many people may not consider insurance to be a key component of wealth planning, but limiting risk is a cornerstone of financial planning for high-net-worth individuals. The more wealth you have, the more you stand to lose as a result of an unexpected event.
Having adequate life insurance coverage, for example, is particularly important for high-net-worth individuals because they have more future income to protect. In addition, traditional property and casualty insurance coverage may not be sufficient for high-net-worth individuals with assets such as arts, boats, and other valuable items. The right insurance can protect your current assets and provide you with legacy planning for generations to come.
Top High-Net-Worth Financial Planning Strategies
1. Comprehensive High-Net-Worth Financial Planning
Comprehensive financial planning can help you overcome the challenge of organizing your finances. This goes beyond investment strategy and includes all aspects of your financial life. From cash flow management to tax planning and charitable giving, taking a comprehensive approach to high-net-worth financial planning can help you understand your full financial picture.
Given the likely complexity of your finances, consider working with a professional financial advisor. A good CERTIFIED FINANCIAL PLANNER® professional, especially one who specializes as a retirement financial advisor, can act as a trusted advisor and project manager. They will help you identify and track all your assets and liabilities, develop a retirement plan, prepare for major financial transitions, choose insurance plans (among others) and keep your progress on track.
And with access to advanced scenario-planning software, you can rest assured that your CERTIFIED FINANCIAL PLANNER® professional can help you prepare for possible eventualities, such as the need for long-term care, a market downturn, a sudden change in income, or anything else life might throw your way.
Read more: What to Look for in a Financial Advisor — 6 Essential Qualities
2. Strategic Estate Planning
If you’re worried about your wealth getting eaten up in various taxes and legal fees when you pass, you’re not alone. Creating a strategic estate plan for distributing your wealth through wills, trusts, and powers of attorney can help ensure that your wealth is distributed per your wishes.
A few estate-planning tips that can help you accomplish this include:
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Creating a revocable living trust: This is a great way to pass on your savings accounts, real estate properties, valuable collectibles, and other holdings to your beneficiaries. There’s no restriction on the type of asset that can be held in a trust, and upon your passing, it will be distributed to your beneficiaries without going through probate, which is a public court process that can cost your heirs a lot of money. Trusts also offer tremendous flexibility as to when a beneficiary will ultimately receive the proceeds.
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Designating a responsible trustee: If you create a family trust, it’s critical to choose a trustee who is capable of handling the responsibility of managing the assets within it. This is especially important if you establish a spendthrift trust, which provides direction on to whom and when trustees should distribute money — typically to prevent a beneficiary from irresponsible spending. To ensure your trustee is as well-equipped as possible, make sure to keep them in the loop regarding any changes you make to the trust.
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Hiring your children: If you own or co-own a business, hiring your children will not only allow you to provide them with an income but also direct that income to a custodial Roth IRA, up to the yearly maximum ($7,000 as of 2024). This is a great way to help your children save for their future and gain financial literacy while reaping tax benefits for yourself as a business owner. There are no age restrictions as long as children earn their own income for jobs that are age-appropriate.
And remember, even after you’ve created your estate plan, you should frequently revisit it. As your life circumstances and finances change, so should your estate plan. Make sure to review it annually (or at least every few years) and update it as needed with the help of a qualified financial advisor or attorney.
3. Advanced Tax Planning
As a high-net-worth individual, you’ve worked hard for your money, and you want to keep as much as possible. However, the more you earn, the greater your tax liability, especially if you don’t do anything differently.
Advanced tax planning involves using sophisticated strategies to reduce tax liabilities. These include tax-loss harvesting, income deferral, charitable donations, and investing in tax-advantaged accounts.
You may be able to reduce the financial stress of complex taxes with smart tax strategies such as:
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Investing in tax-advantaged, diversified investments.
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Reducing the size of your estate through yearly gifts to your children, or directly paying family members’ tuition or medical expenses.
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Implementing charitable giving strategies, such as a Donor Advised Fund, Charitable Lead Trust (CLT), or a Charitable Remainder Trust (CRT), which allow you to make tax deductions while supporting causes that are meaningful to you.
Charitable giving is a generous act that can bring tax benefits. However, it’s important to note that making charitable gifts does not qualify for the annual exclusion amount ($18,000 as of 2024) because this exclusion applies only to gifts made to individuals (natural persons).
Instead, gifts to charitable organizations may be deducted from your taxable income. Large charitable gifts may still affect your estate tax exemption amount ($13.61 million per individual as of 2024). Once you reach your estate tax exemption amount, any additional gifts made during your lifetime or at death will be subject to estate taxes (the current tax rate is 40%).
Larger gifts can still yield large tax savings in appropriate situations by:
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Removing future appreciation in the value of the gifted property from your estate.
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Enabling you to make use of different gifting strategies and structures, such as Qualified Personal Residence Trusts (QPRTs), installment sales, and gifts of partial interests that leverage actuarial factors and valuation considerations to achieve additional savings.
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Capitalizing on current gift and estate tax rules that make paying a gift tax during your lifetime less costly than the tax your beneficiaries would need to pay on your estate upon your death.
Giving cash or other assets that have little or no built-in gains is the most tax-efficient way to gift during your lifetime. There are also techniques such as Grantor Retained Annuity Trusts (GRATs) and installment sales that can be structured to limit or even eliminate any negative gift tax consequences.
Of course, before you make large taxable gifts, you should meet with your financial advisor to decide which assets to give (and when to give them) to help your heirs avoid a large capital gains tax.
Read more: 5 Essential Elements of Tax Planning with a Financial Advisor
4. Choose the Right Insurance
As in other areas of high-net-worth financial planning, you will likely need a more specialized or comprehensive approach to insurance than the average person. Maybe you own high-value properties, valuable collections, or have a high public profile that exposes you to more risk.
Policies such as umbrella liability insurance, high-value home insurance, and specialty coverage for art and collectibles provide enhanced protection that standard policies may not offer. These products can safeguard your assets against lawsuits, natural disasters, and other unforeseen events, ensuring financial stability.
It’s important to work with an insurance specialist to ensure these needs are met, but it’s just as crucial to combine this with the help of a CERTIFIED FINANCIAL PLANNER® professional.
With the knowledge of their respective fields, your insurance specialist and financial advisor can work together to help you find tax-smart strategies such as:
- Irrevocable Life Insurance Trusts (ILITs): Gifted proceeds to an ILIT can be financially leveraged to purchase life insurance. The death benefit from this life insurance, consequently, will not be included in the taxable estate of the trust’s creator, and generally passes to beneficiary recipients free of income taxes. ILITs are frequently used to hold life insurance for high-net-worth households as a way to provide the estate with liquidity, as well as dynasty trust planning for future generations.
Financial Advice for High-Net-Worth Individuals
The items listed above are a few of the many challenges that come along with high-net-worth financial planning. The complications you face, along with the right strategies to accommodate them, will depend on your unique finances, life circumstances, and personal goals.
To get started on your own comprehensive financial plan, or just learn more about high-net-worth wealth management, schedule a call with Team Hewins today.