An experienced management team shepherding your assets can spell the difference between building a secure future or ending up at loose ends.
As a high-net-worth individual, you know that managing wealth is no easy feat. HNWIs face a broader range of considerations than the median earner: paying higher taxes and maintaining complex portfolios, as well as frequently managing entrepreneurial and philanthropic endeavors.
Another pressing concern is the allocation of assets and funds to various family members. Perhaps your children are getting older and will soon be off to college. How are you planning to cover the rising cost of tuition? Maybe your parents are currently enjoying their retirement, but are likely to require more assistance in the next few years. Have you assessed and set aside funds for their long-term care? You and your spouse will want to maintain your standard of living well into retirement years. Are you properly insured in case there’s an accident or medical emergency? Have you arranged your estate so your significant other will be financially secure?
Managing wealth is never a simple matter but addressing the needs of both the younger and older generations as well as your spouse adds another layer of complexity. With the proper guidance, you can put together a plan that accounts for the needs of your entire family.
Concerning Your Children
Whether your kids are learning how to walk or entering adulthood, every parent wants to empower their children and provide them with every possible opportunity for success. Equipping your children with the financial literacy skills they’ll need later in life is fundamental for their prosperity. As a high-net-worth individual, you’ve managed your own wealth successfully, so you’re in a position to lead by example.
While providing your children with a guiding light for financial well-being is important, you must also prepare a plan for passing your wealth to the next generation. You might opt to establish a trust, setting money aside to help your children find their footing in life once they reach maturity. You may also want to consider a college fund, like a 529 plan.
Whichever option suits your family best, it’s smart to plan these savings with a degree of flexibility. Why? The truth is you have no idea who or what your kids are going to be when they grow up. You don’t know how emotionally mature they will be, whom they’re going to marry (if anyone), or what sort of career ladder they’ll be interested in climbing. How do you plan for an individual you’ve yet to meet?
One way to circumvent these uncertainties is with a Uniform Transfer to Minors Act (UTMA) custodial account. A UTMA account allows parents to pass assets to minors in a tax-advantaged environment. Money contributed to a UTMA account is exempt from gift taxation up to a $16,000/year maximum. Any money earned through an UTMA account growth is taxed at a reduced “minor” rate. Furthermore, no formal trust is needed, as the parents are the only ones responsible for assets in the account (though you could appoint a third party to assume fiduciary duties if you so chose).
Think of UTMA as an “upgrade” from the original Uniform Gift to Minors Act (UGMA). Both vehicles are designed to pass wealth on to your children. However, the UTMA allows a broader range of assets to be gifted, including securities like stocks and bonds. Unlike the UGMA, the UTMA also allows you extend the age at which your child would assume control of the account up to 25. With a UGMA account, funds transfer at the age of maturity (18 in most states, though 19 or 21 in several). Think back to your own late teens and early twenties. How responsible would you have been managing sudden wealth? An UTMA account allows parents to delay the transfer slightly, so their children can mature into their higher-income status more comfortably, and hopefully, more responsibly.
Planning for College
Many high-net-worth families still end up borrowing money for college tuition. In fact, Pew Research studies found that borrowing rates among graduates from affluent families have doubled since 1992. Contrary to popular belief, many high-net-worth families still struggle to find tuition relief, especially as fees climb year after year. Such families, on paper, are “too rich” for financial aid. They could technically “afford” tuition, but not without sacrificing a large portion of their net worth, and so find themselves caught in limbo. So how can high-net-worth families prepare for the inevitable college tuition bill?
It’s best to get an early start when saving for your children’s education. Eighteen years may seem far-off when your child is just a baby, but starting the college fund as soon as possible alleviates later stresses. Currently, annual tuition fees in the U.S. average:
- $38,000/yr for private colleges
- $10,700/yr for public colleges (in-state)
- $27,500/yr for public colleges (out-of-state)
This does not include average room and board costs, which run approximately $13,600/yr for private and $12,000/yr for public institutions. In all, you’re looking at an average $50,000 yearly investment at a private institution. And that’s just the average. If your child wants to attend an Ivy League school, you can expect to pay $70,000-$85,000 a year for tuition and fees. So, how can you start saving today?
High-net-worth individuals should consider a 529 plan. The 529 plan is a state-sponsored, tax-advantaged fund targeted specifically at college expenses. 529s work like 401(k)s and IRAs—contributions are invested in mutual funds and other market investments to grow tax-deferred. You can elect to invest those funds more aggressively when your child is younger and shift more conservative as they approach college age. Because of the tax-deferred growth, these funds realize greater after-tax investment gains than a traditional savings account. And when it comes time for school, 529 plan distributions are tax-exempt as long as they pay for qualified college expenses. You can also spend up to $10,000 on K-12 education.
Concerning Your Spouse
When it comes to managing wealth for your future, you and your spouse have undoubtedly discussed how to best insure your earnings against uncertainty. Many couples choose to invest in a life insurance policy, as they well should. You’ve worked hard to build wealth for your family, and there are instruments to help preserve the wealth within your family. This is especially true when passing along your estate. If your estate’s value exceeds the $12.06 million exemption, responsibility for paying federal estate taxes will fall to your heirs. Life insurance is a smart way to mitigate the impact of estate taxes, ensuring your family gets most of what you’ve left as a legacy. Furthermore, premiums paid into a life insurance policy may be deducted from the value of your estate if established correctly.
POLARIS PRO TIP: Life insurance can be an expensive investment tool. Term life insurance may be the most appropriate option. Take the emotion out of the decision, and speak with a representative at Polaris Wealth Advisory Group about the different life insurance options today.
However, for the high-net-worth individual, this is not enough. There are a wide array of insurance policies HNWIs and their partners should consider in tandem to properly protect their fortune and ensure the future of their estate. Unfortunately, many HNWIs find themselves too often underinsuring major threats to their fortune, while over-insuring the minor ones. In addition, many mass-market policies are limited, and may not offer the kind of coverage HNWIs need to truly protect their wealth and families. Seek out other complementary policies targeted to high-net-worth individuals that go above and beyond basic coverage.
Outside of the traditional insurance framework, couples may choose to secure each other’s fortunes with mirror wills. The concept is in the name: mirror wills are separate, nearly-identical wills that list each other as the beneficiary. They also typically follow the same distribution plan in the event of both partners pass. Mirror wills establish a clear reciprocity between partners in the event of death.
Alternatively, couples can establish a shared living trust. The living trust operates like the aforementioned mirror will in that it establishes a clear equality in inheritance between partners. Couples who create a living trust serve as co-trustees in life; then when one partner dies, the other inherits the other’s share in full. Couples can also name heirs for when they both die.
Maintaining a HNW Lifestyle in Retirement
Say you’re a high-net-worth individual who’s lived a prosperous life. Don’t you and your spouse want to continue that lifestyle through retirement? HNWIs who earned their wealth through investing can continue to do so no matter their age. However, business owners who finally decide to fully retire may see a drastic drop in income.
One of the final steps in managing wealth during your working years is converting illiquid assets into more liquid ones. What does this mean? “Illiquid” refers to an asset (stock, bond, or piece of real estate) that you can’t convert into cash quickly. What good is a valuable piece of real estate you no longer use? In a buyer’s real estate market, you could have a hard time recouping the total value of that land.
For this reason, long-running wealth management and retirement/estate strategies are essential financial pillars for high-net-worth individuals and their partners. Determining how much you’ll need to maintain your lifestyle in retirement can tell you how much you need to save and when. Perhaps you’re looking to scale things back and live a simple retirement. While not nearly as complex as other arrangements, you’ll still want to plan your estate for when you inevitably pass it on to your heirs.
Concerning Your Parents
While your children are one set of dependents, they’re likely not the only ones on your mind. As a high-net-worth individual, you may intend on providing for your parents as they age. There will, unfortunately, come a time when your parents cannot care for themselves as well as they used to, and a discussion about senior care and housing should be had.
To preserve an aging parent’s financial stability, you should have frank conversations with them about managing their wealth and estate planning, and communicate the possibilities, analyze the pros and cons of potential situations, and assign cost estimates to each scenario. Everyone will then have a realistic picture of the financial demands, depending on long-term care needs.
The Costs of Senior Care
When it comes to senior living and care arrangements, there are a variety of options. Consider these with your parents, and make a choice that best addresses their health and abilities.
Seniors with the good fortune of being able to live with minimal assistance might consider independent living communities. These planned communities operate as fully-equipped living complexes for seniors. The residents can take care of themselves, for the most part, and have access to on-site laundry, transportation, meals, and activities. Attendants are always present on-site in case they’re needed. Expenses vary, but according to A Place For Mom’s 2018 Cost Index, the median price of an independent living facility is approximately $2,500/month—a figure which has likely only increased since.
Meanwhile, assisted living communities present the next level of intervention. These are meant for seniors looking to maintain some independence; however, they need assistance performing certain day-to-day activities like dressing, bathing, and taking medication. According to a 2020 Genworth Cost of Care Survey, the average cost of a single-bedroom assisted living community apartment runs approximately $4,000/month.
Finally, nursing homes and special/memory care facilities are meant for seniors who require around-the-clock care and attention. Housekeeping staff handle day-to-day chores like cleaning and laundry, while nurses and other healthcare staff take care of your loved one’s medical needs. Special/Memory care facilities specialize in seniors living with dementia or Alzheimer’s. This type of care can cost around $290/day for a private room and $255/day for a semi-private room.
While the arrangement of where your parents will age is crucial, it’s equally important to establish a means of funding their care. Your first instinct may be to liquidate their stocks and retirement savings. However, this will almost always result in tax obligations. To avoid the tax issue, you may rely on their IRA minimum withdrawals to stay solvent. An important note as their child: after a parent dies, their children are required by the SECURE Act to entirely disperse IRA funds within 10 years. If the beneficiaries work, they will have to pay tax on those distributions potentially at a considerably higher tax brackets. Therefore, consider maximizing distributions over time to keep in an optimal tax bracket.
Secure Your Family’s Future Today—Hire a Wealth Advisor
Managing wealth for high-net-worth families is a complex endeavor, full of twists and turns. Finding the right wealth management partner is critical for your holdings and future. With proper guidance, you can ensure your family’s financial security and success.
Whether you’re sending your kids to college or caring for your parents, the advice of a professional wealth manager is invaluable. An experienced management team shepherding your assets can spell the difference between building a secure future for your family or ending up at loose ends. Get in touch with Polaris Wealth Advisory Group experts today for guidance on wealth management and intelligent investments.
This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.
