The Ultimate Guide to High Net Worth Financial Planning
When it comes to financial planning, the needs of high-net-worth individuals are markedly different from those of middle-class individuals. While the typical middle-class approach focuses on saving for a home, retirement, and higher education, high-net-worth individuals face a broader array of opportunities – and yes, complexities.
For example, their focus may extend beyond buying a single property to include substantial real estate investments, moving from basic tax payments to employing intricate strategies for minimizing tax liabilities, and transitioning from standard 401(k) investments to more sophisticated investment strategies like separately managed accounts and nonqualified retirement plans.
So, where should one begin to grasp the nuances of high-net-worth financial planning, including the strategies involved and their benefits? The best approach is to start by partnering with a knowledgeable financial professional.
That’s where we come in. At Olympic Wealth Management, we are a fiduciary financial firm based in the Seattle area, specializing in high-net-worth investment and retirement planning. Our mission is to offer discerning investors reliable control over their wealth within a pressure-free and transparent environment, all firmly grounded in mutual trust.
Keep reading to gain a clearer understanding of high-net-worth financial planning—what it involves, and the strategies that can help you accomplish your financial priorities.
What is High Net Worth Financial Planning?
So before we dive into strategies, let’s discuss what exactly high net worth financial planning is. High-net-worth financial planning is a specialized field focused on managing and growing the substantial wealth of affluent individuals and families. With greater assets and higher net worth come more complex financial goals which require more sophisticated strategies. In other words, the stakes are higher, and the financial plan needs to be more advanced.
This type of financial planning typically includes:
1. Portfolio Management and Diversification
2. Risk Management
3. Tax Mitigation Strategies in collaboration with tax professionals e.g. CPAs
4. Charitable Giving
5. Use of Trusts where appropriate
6. Estate Planning as designed and determined by qualified legal professionals
Who are High-Net-Worth Individuals?
An ultra-high-net-worth individual (UHNWI) is someone with a net worth exceeding $30 million. In contrast, a high-net-worth individual (HNWI) has at least $1 million of investable assets. Both types of investors typically have more complex financial needs and goals, and work with financial professionals to manage their wealth.
There are several pathways to becoming a high-net-worth individual. Beyond just earning income, saving and prudent investing, other routes include inheriting wealth, monetizing a valuable asset like a business or real estate, receiving a large settlement, or a substantial life insurance payout. Large legal settlements, favorable outcomes in high-stakes financial deals, or lucrative intellectual property agreements can also play a role. Each of these avenues can help someone achieve high-net-worth status.
At Olympic Wealth Management, we specialize in working with high-net-worth individuals. We understand the unique financial landscape you navigate and are here to help you manage your wealth and create a solid investment plan.
Challenges High Net Worth Investors Face
The saying “more money, more problems” often rings true when it comes to finances, especially for high-net-worth investors. With substantial wealth comes a unique set of challenges, including:
Maintaining Lifestyle after Retirement
If you’re a high-net-worth investor, maintaining your accustomed lifestyle after retirement is likely among your most important priorities. One significant challenge is ensuring that your investments are managed smartly to sustain their lifestyle (extended and/or international travel, fine dining, luxury vehicles, custom goods etc.) without compromising your financial security. HNWIs are often accustomed to a high level of cash flow, and adjusting to a more fixed income can be difficult if they haven’t planned accordingly.
Additionally, many HNWIs have substantial portions of their wealth tied up in illiquid investments, such as real estate, private equity, or collectibles. These assets, while potentially lucrative, can be difficult to quickly convert into cash if immediate liquidity is needed.
Changing Tax Codes & Tax Implications
With higher amounts of money comes greater tax exposure. Federal and state income tax where applicable, capital gains tax, property tax, estate tax, and others can significantly impact one’s wealth. That’s why effective tax planning is a major concern for high-net-worth individuals. A key objective is minimizing the amount of money paid in taxes so it doesn’t eat away at their accumulated wealth. Plus, changes in tax policies add an additional layer of uncertainty and complexity for HNWIs, who must adapt their financial strategies accordingly.
A Diverse and Large Portfolio of Assets
HNWIs often hold a wide array of assets, from real estate and stocks to private equity and alternative investments. Managing such diverse and substantial portfolios presents unique challenges such as balancing the performance and risk of each asset, ensuring liquidity, and maintaining a cohesive strategy.
Risk Management
With larger amounts of wealth typically comes more risk, and thus the need for sophisticated risk management strategies. HNWIs face various risks, including inflation, market volatility, economic downturns, global events and potential liability issues. Adequately protecting assets requires a careful assessment of risks and implementation of strategies including diversification, insurance, and hedging where appropriate.
Achieving Complex Financial Goals
High-net-worth individuals often have more complex financial goals and objectives they are striving to achieve. While most individual investors are concerned with buying a house, funding children’s tuition, and saving for retirement, high net worth individuals typically have already achieved these financial milestones. They have more intricate financial objectives, such as tax mitigation, charitable giving initiatives, and building lasting generational wealth through trusts. These complex goals require specialized expertise and careful coordination.
High Net Worth Financial Planning Strategies
Now that you have an understanding of high-net-worth financial planning and the challenges investors face, you might be wondering: What strategies can help navigate these challenges?
As mentioned earlier, effective planning often involves a range of strategies, including portfolio management and diversification, risk management, tax mitigation, charitable giving, trusts, and estate planning. Let’s start by exploring tax strategies in detail.
High Net Worth Tax Strategies
For high-net-worth investors owning large taxable investments, effective tax planning is paramount. The reason is two fold: First, high taxes threaten the conservation and growth of wealth if steps aren’t taken toward meaningful mitigation. Second, HNWIs are often subject to complex tax laws, sometimes spanning across multiple states and even countries. If they don’t have a thorough understanding and adherence they could be subject to fines or legal repercussions.
Here are a few high net worth tax strategies that can notably lower your tax burden, ensuring more of your wealth is preserved and passed onto future generations.
1. Tax Loss Harvesting
To minimize capital gains taxes, HNW investors utilize a strategy known as tax loss harvesting. It involves selling assets that have experienced a loss and using those losses to offset capital gains realized throughout the year. This can help reduce an investor’s overall taxable income, resulting in less taxes owed. Generally, any surplus unused losses can be carried forward and used to offset gains in future years.
2. Tax-advantaged investments
Another strategy that can be used in conjunction with tax loss harvesting is investing in tax-advantaged accounts such as a 401(k) or IRA. These accounts offer tax benefits, such as tax-deferred growth and the ability to contribute pre-tax income, which can help mitigate the impact of capital gains taxes. One drawback to these are their rather modest contribution limits. More advanced solutions like cash balance pension plans for smaller employers have the potential to deliver much greater tax advantages.
3. Timing income and deductions strategically
Another tax tactic is timing income and deductions strategically. By delaying the realization of capital gains, an investor can defer paying taxes on those gains until a later year when their income may be lower. Similarly, accelerating deductions into the current year can help reduce taxable income.
4. Charitable Giving & Trusts
Charitable trusts, including Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs), offer high-net-worth individuals a strategic way to achieve philanthropic goals while also benefiting from significant tax advantages.
5. Charitable Giving & Trusts
Charitable trusts, including Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs), offer high-net-worth individuals a strategic way to achieve philanthropic goals while also benefiting from significant tax advantages.
Charitable Lead Trusts (CLTs): A Charitable Lead Trust is a permanent trust arrangement where income is provided to a designated charity for a fixed term, after which the residual assets are passed on to non-charitable beneficiaries. The key benefits of a CLT include:
– Immediate Tax Deduction: HNWIs can receive an immediate charitable income tax deduction based on the present value of the income stream that will be provided to the charity.
– Estate Tax Benefits: Since the charitable portion is removed from the grantor’s estate, CLTs can help reduce estate taxes, potentially preserving more wealth for heirs.
– Wealth Transfer: By using a CLT, HNWIs can pass on remaining assets to beneficiaries with reduced gift or estate tax implications
Charitable Remainder Trusts (CRTs): A Charitable Remainder Trust allows UHNWIs to donate assets to the trust, which then provides income to the donor or other beneficiaries for a set period. At the conclusion of this term, the trust’s residual assets are given to a designated charity. Benefits of a CRT include:
– Income Tax Deduction: Donors can claim a charitable income tax deduction based on the present value of the remainder interest that will go to the charity.
– Income Stream: Donors or other beneficiaries receive regular income payments from the trust during their lifetimes or for a specified term, which can be particularly attractive for those looking for a stable income source.
– Capital Gains Tax Deferral: Assets donated to a CRT are typically sold by the trust without incurring immediate capital gains taxes, allowing the full value to be invested and generate income.
High Net Worth Investment Strategies
With a grasp on some key tax strategies well-suited to high-net-worth individuals, let’s now delve into some proven financial strategies for high-net-worth financial planning.
Diversification
Portfolio diversification for high-net-worth individuals can extend beyond the traditional mix of equities, fixed income, and cash. These types of investors may choose to incorporate alternative investments such as hedge funds, private equity, credit, real estate, and commodities which allow for potentially higher returns. At Olympic Wealth Management access to these other types of assets is limited.
For example, a high-net-worth individual may invest a significant amount in a tech startup that, despite its initial promise, doesn’t get off the ground. However, because the investor’s portfolio was well-diversified, the impact of this underperforming asset was mitigated.
Risk management
Risk is unavoidable when it comes to investing. If you’re a high-net-worth investor, you likely want to balance your investment objective across a continuum of growth potential combined with asset preservation. You want to take steps to mitigate risk and ensure the best possible return. However, that doesn’t mean there won’t be bumps along the way. Some wise words to remember are these: Diversification doesn’t prevent disappointment. It prevents disaster.
Estate Planning
For high-net-worth individuals, estate planning is about more than just passing on a house or a sum of money. It’s about ensuring that their wealth endures and continues to benefit future generations in the precise way(s) they desire. Rather than seeing their estate dissolve or be mismanaged after their passing, HNWIs aim to craft a plan that maintains and preserves their legacy. This involves navigating complex decisions about how assets are distributed, who will receive them, and under what conditions.
Trusts
A trust means that you will relinquish direct control over the assets. However, you (the grantor) can still influence how the assets are managed and distributed through the terms of the trust. You can specify conditions or guidelines for how and when your child receives distributions, such as milestones or specific needs (e.g., education or health expenses). Trusts allow you to pass your assets to younger generations of families, preserving wealth for future generations.
For example: If you establish an Irrevocable Trust and transfer $5 million into it for your child, you can outline specific terms for how and when your child will receive distributions. Perhaps you specify that the funds be used for educational expenses or only distributed upon reaching certain milestone ages like 21 or 25.
Gifting strategies
Gifting strategies involve giving away some of your wealth during your lifetime to reduce the size of your estate and potential tax liabilities. This could include annual gifts up to a certain amount, or using trusts to gift large sums of money while still maintaining some level of control over how the funds are used.
For example: For instance, in 2024 you can gift up to $17,000 per individual year without incurring gift tax. This means a high-net-worth individual could make annual tax-free gifts of $17,000 to each of their children and grandchildren, totaling $153,000 per year.
Create Your High Net Worth Financial Plan with Olympic Wealth Management
Now that you have a solid understanding of high-net-worth financial planning, including the associated challenges and strategies to address them, it’s clear that partnering with a skilled financial advisory firm is crucial. When tailoring custom solutions for our HNW clients, at Olympic Wealth Management we draw on more than 40 combined years’ of experience.
Our expertise in complex investment and retirement planning ensures that we can offer solutions designed specifically for those with significant wealth. By working with us, you can:
– Create a broader, better-diversified range of investment opportunities
– Control risks that jeopardize financial security
– Remove fear and euphoria from investor decision-making
– Remove stress/uncertainty from the investment planning process
– Create a retirement investment strategy that allows you to maintain your lifestyle after retirement.
– Minimize your tax burden
– Secure your wealth for future generations
To begin crafting your personalized high-net-worth financial plan, schedule a consultation with Eric Cumley, our trusted fiduciary financial advisor.