High-net-worth individuals with a firm grasp on financial planning and wealth management will be better prepared for future success.
Wealth management and financial planning are easier when you have more money… right? Think again. When it comes to investments, high-net-worth individuals (HNWIs) simply have more money to work with—it doesn’t mean management gets any simpler. Would it be safe to say the opposite is more accurate? More money… more management mountains to climb? Let’s see.
HNWIs have access to alternative investments beyond the average stock or bond exchange including private equity, venture capital, derivatives, real estate, and hedge funds. However, these investment types come with greater exposure to risk—which is, thankfully, something a wealth management team can manage when building a financial plan.
Another one of the largest hurdles is taxation—specifically, how to navigate the complicated U.S. tax system. A wealth manager comes steeped in knowledge about the tax code and can help legally shield your money from heavy taxation. Often times, he most significant liabilities come from capital gains, which are taxes paid after selling assets such as property or stocks for a profit. Wealth managers know how to coordinate accounts and income streams to limit taxes as much as possible.
Additionally, high-net-worth individuals have their estate and heirs to keep in mind. When there’s more money to allocate amongst others, the risk of confusion and tension increases exponentially. With a clearly-defined wealth succession plan in place, you can pass your assets down to others without worry.
Indeed, more money does mean more complexity to manage.
Careful wealth management and financial planning are key for high-net-worth individuals to secure the years to come. However, an extensive asset and investment portfolio may prove too complex for the busy professional to handle alone. A competent wealth manager can provide the advice needed to create a personalized financial plan tailored to you and your risk tolerance.
Let’s consider the four major pillars of wealth management and financial planning that wealth management teams help HNWIs navigate:
- Asset management
- Estate planning
- Risk management
- Debt management
All things considered, the high-net-worth individuals with a firm grasp on financial planning and wealth management will be better prepared for future success.
Pillar One: Asset Management
As a high-net-worth individual, you spread your assets over many different classes. Whether it’s a diverse stock portfolio, real estate, or liquid cash, managing those assets is pivotal to your financial future.
What Is Asset Management?
Asset management is about positioning your available assets for future growth. This involves buying, nurturing, trading, and selling those assets when it best serves you financially. Thankfully, asset management professionals—also referred to as portfolio managers or financial advisors—are here to perform this service for you.
HNWIs may have varying financial situations. An asset manager can identify investments suited for your particular plans, aiding you when it comes to asset allocation. Your asset manager’s objective is to maximize the value of your investment portfolio—they make money as you make money, with their fee sharing in portfolio gains and losses just like you. Asset managers determine their rates based on the percentage of a client’s assets under their management (also known as assets under management, or AUM). Typically, the more money they make for you, the more assets you’re willing to put in their care—and the more they make based on their percentage rate.
The Benefits and Importance of Asset Management
Anyone looking to grow their portfolio understands the importance of asset management—‘set-and-forget’ has no place here. So what are the most impactful ways asset managers help high-net-worth individuals?
- Tracking Assets – The bigger the portfolio, the harder it is to keep track of all the assets it contains. Asset managers have everything laid out on the proverbial table. They make it easy for you to understand and efficiently utilize what you have available.
- Keeping Accurate Records – Asset managers keep regular tabs on everything in your portfolio. In doing so, they ensure that your financial statements are appropriately recorded. This may include any loan repayments, business write-offs, and several other examples of amortization.
- Managing Risk – Every investment comes with inherent risk. Asset managers work with high-net-worth individuals to establish their risk tolerance and identify investments that work within the set parameters.
- Cleaning the Books – When assets pile up, worthless, stolen, damaged, or lost assets may be accidentally recorded in your portfolio. Asset managers work to polish and purge your books of any issues throughout the years.
How to Develop an Asset Management Plan
Though asset management is such a critical piece of the financial puzzle, some high-net-worth individuals may not know where to start. One of the best jumping-off points is to develop a strategic financial plan which includes the following exercises:
Take Inventory
If you don’t know what assets you have on hand, how are you or anyone else supposed to manage them? Take a complete inventory of all your available assets and their individual attributes including:
- Location (liquid, investments, or real estate)
- Current value
- Cost basis
- Date acquired
- Expected life cycle
Factor in Life-Cycle Costs
Many mistakenly ignore the added costs associated with some of their assets. In terms of physical assets, like real estate, life-cycle costs include any additional expenses associated with a property. You may have purchased a building for $1 million, but the new plumbing you had installed last year cost an additional $30,000. Keep in mind, such expenses aren’t limited to just physical maintenance, or even physical assets—so dig deep.
Rank Your Assets and Determine Their Levels of Service
Not all assets are equal. It’s important to identify what returns your assets provide for you, and what maintenance is involved on your end. Some offer tangible benefits, while others earn passive gains. For example, a business owner’s most important asset is likely their business. That business owner should identify how their business is performing for them, and in exchange, determine the amount of funds, maintenance, attention, etc. necessary to keep it in good standing. This would all equate to that asset’s level of service.
Plan For the Long-Term
This process isn’t aimed at short-term gains and stability. Instead, tailor this appraisal to your long-term plans, including retirement and wealth succession. Putting such a plan in place can help you determine which of your financial goals are attainable and most important.
Pillar Two: Estate Planning
Everyone arrives at the end of the road eventually. Whether or not you have an established estate plan determines what happens to your assets after your death. An estate plan comprises legal documents that determine how to distribute your assets after you pass. Estate plans address what to do if you’re unable to care for yourself or your home such as in the event of illness or disability.
Without a concrete plan in place, your assets could be turned over to the courts to handle. To avoid this, high-net-worth individuals should work with their lawyers and wealth advisors to set up an estate plan for the future. So, what do estate plans cover? How will your assets be taxed? And what steps should you take first?
What Is Estate Planning?
Estate planning puts you in control of your assets and estate after death. Your estate encompasses everything you own, including all cash, property, business interests, investments, and vehicles. An estate plan ensures everything is distributed according to your wishes.
Even before death, in the case of illness or an incapacitating disability, an estate plan tells your loved ones how you’d like to be cared for. Additionally, it can appoint someone to take charge of your finances and long-term medical care, and someone to care for your children if they can’t care for themselves.
One of the more important concerns when planning your estate is how to allocate your assets in the most tax-efficient way. Estates valued above certain thresholds are subject to federal estate taxes. Furthermore, estate and inheritance tax laws vary from state to state, so you must stay aware of your state’s current legislation.
Many people won’t have to worry about paying federal estate taxes, as the value of their estate doesn’t exceed the set threshold. However, high-net-worth individuals must plan carefully to avoid losing large parts of their estate to taxation—another instance where having more to manage means more to consider.
Steps In Estate Planning
Don’t wait until the last minute to put your estate in order. The earlier you begin making plans, the more settled those plans become. The last thing you’d want is for your loved ones to spend unnecessary time in probate court settling will and estate issues. Here are some steps that high-net-worth individuals can take when planning their estates.
Step 1: Take Inventory
As with asset management, you can’t divide your estate if you don’t know what’s in it. You’ll be surprised at how many tangible and intangible assets you have but weren’t aware of. Tangible assets include anything physical—think cash, property, vehicles, jewelry, and collectibles. Meanwhile, intangible assets encompass those that aren’t strictly physical. This might include include stock portfolios, bank accounts, insurance policies, patents, and retirement plans.
Once you’ve taken a full inventory, you’ll need to determine the combined value of those assets—which can sometimes prove challenging.
A recent home appraisal can tell you how much your home is worth. Its value is easy to measure against your other tangible assets. Meanwhile, other assets won’t be so simple to appraise. Certain family heirlooms may mean more to your youngest daughter than your oldest son. For items you can’t appraise objectively, assign them value based on how your heirs might value them.
Step 2: Prioritize Your Family
Now that you know what the assets in your estate are worth, you’ll need to determine how each asset will benefit your family members and their specific needs. Your estate is yours and yours alone to distribute. For that reason, wills and trusts are essential for avoiding family conflict and court proceedings.
If you still have minor children, your estate plan must account for their guardianship after your death. When you write your will (because you can’t name guardians with a trust), establish who will receive legal custody of your children. Pick a backup guardian as well should something unforeseeable happen. Guardianship disputes can lead to costly family court battles, which may consume a significant portion of your estate through court and attorney fees.
Step 3: Set Legal Directives
As previously stated, without proper estate planning, a portion of your assets may wind up in the hands of the state—a situation you want to avoid. Wills, trusts, and powers of attorney are a few examples of legally binding documents that can keep your family out of court when you pass.
- Wills – One of the most common forms of estate planning is a will—a legally enforceable document that states how to handle your affairs and assets after you pass. However, wills must go through a legal process called probate before they are enforceable, whereas trusts do not.
- Trusts – While you—the trustor—are still alive, you establish a trust and designate who receives certain assets upon your death. In the meantime, a designated outside party—a trustee—retains control. The trust becomes operational after the trustor’s passing, at which point the trustee is responsible for distributing the assets within the trust to the named beneficiaries.
- Durable Financial Power of Attorney – When someone is granted authority over your financial affairs, they are your durable financial power of attorney. They can sign legal documents and manage finances on your behalf. This includes everything from paying bills and taxes to gaining access to your accounts and assets. You can also opt for limited power of attorney if the idea of turning everything over to one person isn’t attractive to you. For high-net-worth individuals, it’s imperative to be extra cautious about the person to whom you’re granting power of attorney.
Step 4: Know Your Beneficiaries
Your trusts and will name beneficiaries of your assets. However, you may have several other legally-binding documents that also name beneficiaries you may have forgotten about. Many of those documents can override your will. One example is the beneficiary designated on a retirement or insurance account. You’ll want to make sure the right people get your assets, and that the names on those accounts match the names laid out in your will.
Old life insurance policies, safe deposit boxes, and savings accounts might have a named beneficiary that’s no longer in the picture, like an ex-spouse or deceased relative. You wouldn’t want to accidentally transfer your savings account to your ex when it’s intended for your current spouse!
Finally, make sure you always name a beneficiary whenever required—you can always change it later. An empty line will forfeit distribution decisions regarding an asset.
Step 5: Become Familiar with State-Level Estate/Inheritance Tax Laws
Only estates valued at or above $12.06 million are subject to federal estate tax. In addition, as of 2021, 17 states have either an estate tax, inheritance tax, or both. If your estate exceeds the federal threshold, you can consider opening a grantor retained annuity trust (GRAT), an irrevocable trust that could lessen estate taxes.
Other Considerations Regarding Wills and Trusts
Wills and trusts are valuable estate planning tools that determine how to distribute your assets to your heirs and beneficiaries. While both do the same general thing—divide up your assets—they have significant differences.
Wills only go into effect after your death, and must go through several legal steps in probate court before any assets actually pass on. Anything passed down through a will also becomes part of the public record.
Meanwhile, trusts are set up before you pass, and the planned distribution of assets within the trust is known before your passing. Trusts don’t require probate court, nor are they part of the public record. If you’re looking to pass on your assets in private, trusts are the better option.
When you set up a trust, you’ll name a trustee responsible for distributing the contained assets to the named beneficiary. Such assets might involve a large inheritance entitled to young children, in some cases. Perhaps you don’t want them to receive the entire amount at once, so you set up a trust and name a trustee to distribute portions of the money as the children get older.
So overall, which is better: wills or trusts? High-net-worth individuals might consider using both as valuable estate planning tools. If you’re looking to keep your family affairs private and out of probate court, trusts are probably the better way to go. They may cost hundreds to several thousand dollars to establish, but are less expensive than court and attorney fees in the long run. Wills are best used to establish guardianship of minor children and convey how you wish your memorial service to be conducted.
Estate Tax and the High-Net-Worth Individual
When you pass, your estate and assets may be subject to taxation depending on where you live and how much everything is worth. As mentioned above, as of 2022, any estate valued under $12.06 million isn’t subject to federal estate tax. However, the thresholds and percentages for state-level estate and inheritance tax vary from state to state, so you’ll have to research how your state handles it.
The federal threshold of $12.06 million operates as a maximum allotted tax deduction when it comes to the value of your estate. Anything over that deduction (more than $12.06 million) is subject to estate taxation. So if your estate in 2022 is valued at $12.36 million, you’d only pay taxes on the $300,000 difference. Furthermore, the value of your estate is calculated by what’s called its ‘fair market value’ (FMV). This protects the estate from taxation at peak valuation. For example, if you bought your home for $6 million, but it’s only worth $4 million upon death, then only the latter figure counts towards the value of your estate.
Under the unlimited marital deduction provision, anything left to a spouse is not subject to estate tax on any level. However, at the surviving spouse’s death, beneficiaries of the estate will owe taxes if the value exceeds the established limit. Heirs can also sign an inheritance or estate waiver, declining their rights to an inheritance. They may do this to avoid paying taxes on the inheritance, or avoid its seizure by a creditor or debt collector in the case of bankruptcy.
Pillar Three: Risk Management
Every financial move we make comes with inherent risk. For high-net-worth individuals, risk management is one of the most important tools they can use to manage losses and maximize profits. Risk comes in many different shapes and sizes. So what are the different types of financial risks you might face as an individual of high-net-worth, and how can you better navigate them in times of volatility?
The Importance of Risk Management
As it would be unwise for a poker player to bet on every hand, it would be unwise for HNWIs to bet on every stock, bond, or asset. Investors, companies, and high-net-worth individuals practice risk management as a strategy to reduce the chances of making a bad bet. The practice ranges from investing in low-risk securities to appropriate portfolio diversification—which may be more difficult than you think.
For example, some investors believe they’re sitting on a diverse portfolio after buying several different mutual funds. However, upon closer examination, those funds may be invested in the same or similar stocks. If one sinks, they could all sink together. A general rule of thumb to follow is that the more low-risk investments in your portfolio, the more your odds are managed (although return expectations are reduced as well).
You may ask yourself, “If I only make low-risk investments, how will I ever make money?” Proper risk management isn’t about breaking even. It’s about mitigating loss in times of high volatility and maximizing gains during upswings. There’s no one-size-fits-all approach—an investor must assess their own capacity for risk by asking themselves the following questions:
- What’s my capacity for risk? How much can you afford to lose before it negatively affects your financial security? Your risk capacity varies based on your age, financial goals, and timeline. Contrary to some one-size-fits-all advice, older high-net-worth individuals usually have more money to invest, which may permit them a higher tolerance for risk than, say, a young up-and-coming entrepreneur.
- What are my needs? Someone relying solely on investments for income may need to balance their low-risk investments with more high-risk ones. Conversely, someone looking to grow their retirement funds might be more attracted to low-risk options exclusively.
- How do my emotions affect my choices? Bad news will inevitably rear its head. How you process that information (with fear, panic, or clarity) determines how you’ll recover going forward. Emotions vary for everyone based on investing experience. It’s not easy to predict how you’ll react until it happens, but by recognizing your emotional response, you will be better prepared to avoid making snap, short-sighted decisions.
Types of Risks
Financial risk can be vague to many people—after all, every dollar traded in exchange for goods and services is technically a risk. So what are some more substantial risks facing high-net-worth individuals in today’s financial market?
Volatility Risk
Paying attention to an investment’s beta value (its fluctuation percentage relative to the market as a whole) can help high-net-worth individuals determine which investments are sound additions to their portfolios. In general, investments with a beta value greater than 1.0 are considered more volatile than the underlying market. Investments with a beta value less than 1.0 are considered less volatile.
For high-net-worth individuals, especially those investing in options, it’s essential to consider volatility risk. Price swings can affect your portfolio in both positive and negative ways. It’s how you navigate the negative swings that could ultimately help you control your losses. The uncertain nature of options trading begs for deeper consideration of volatility risk as calls and puts are essentially bets on how you think a particular stock will perform.
Inflation Risk
Inflation should be on every high-net-worth individual’s mind as they roll into 2022. With the Federal Reserve’s recent tapering announcement, paired with Chairman Powell’s views on transitory inflation—or the lack thereof—inflation, especially in the bond market, is a risk HNWIs should follow closely.
Also called purchasing power risk, inflation risk is the chance that cash from an investment won’t be worth as much in the future. Inflation risk assessments examine how soaring inflation levels (7% as of December 2021) could diminish returns as the value of your investments erodes.
Bonds and cash-heavy investments are more susceptible to inflation risk. With bonds, your returned principal may take a hit based on inflation upon maturity, as the $1,000 you invested five years ago might not have the same $1,000 worth of purchasing power today.
In the short term, inflation risk shouldn’t concern HNWIs very much. However, long-term cash flow tied up in several investments is more exposed to rising inflation, and could diminish the expected real returns.
Market Risk
Consider how a changing market may help or hinder your current investments. Are your investments likely to decline in value if significant economic or market changes occur? This is the market risk of your investment. Market risk is a broad concept that boils down to a few different risk categories like equity, interest rate, and currency risk.
Every kind of investment is susceptible to equity risk, which is the chance that the equity share price of an investment will fall, resulting in a loss. Of course, high-net-worth individuals with higher tolerance for volatility can generally ride out the dips in their portfolio, thus controlling equity risk with proper management strategies.
In the bond market, market risk exists in the form of rising interest rates, resulting in falling bond prices. Investors should expect interest rates to go up once the Fed concludes its bond purchasing program sometime in early to mid 2022.
When dealing in FOREX trading, currency risk (or exchange-rate risk) deals with the fluctuating prices of foreign currency. For example, a currency risk assessment would examine the Euro’s (EUR) value against the U.S. dollar (USD).
Liquidity Risk
Liquidity risk applies to one’s ability to pay off short-term debts. When assets and investments cannot be liquidated to avoid loss in a volatile market, a company or individual may be unable to pay off their debts. Investors, businesses, and financial institutions that can’t meet their short-term debt obligations experience liquidity risk.
To hedge against liquidity risks, high-net-worth individuals must consider whether or not they can cover short-term debts with cash on hand before investing in long-term assets.
Elements of Risk Management Assessment
Examining your tolerance for risk on a more holistic level can profoundly benefit your portfolio. These methods include behavioral finance, scenario analysis, and deep diversification.
- Behavioral finance – A strategy that examines how your emotions affect you as an investor. Analyzing your past decisions when facing gains and losses can help you make better choices in the future. This strategy goes beyond the basic investor profiles of conservative, moderate, and aggressive, painting a more detailed picture of you as an investor.
- Scenario analysis –An examination of your portfolio that runs it through a series of market scenarios to see how it would perform. Such scenarios might include cumulative loss over a particular period or even loss of primary income.
- Deep diversification – A method that doubles down on the “don’t keep your eggs in one basket” mantra. Deep diversification examines a broader range of asset categories, and avoids generalization in one sector. This strategy should be more capable of creating a truly diversified portfolio than randomly overlapping investments or a portfolio allocation model.
Risk Management Strategies
What kinds of strategies do investors use to manage risk other than basic portfolio diversification?
Lowering Volatility
One fundamental way to lower portfolio volatility is to allocate a set percentage to cash or cash equivalents. Cash equivalents include certificates of deposit (CDs), money market funds, and U.S. Treasury Securities. You can always rebalance your portfolio when it becomes too stock- or sector-heavy. Even if it means letting go of appreciating investments in exchange for declining ones, rebalancing can keep you within your risk tolerance threshold.
Dollar-Cost Averaging
Smart investors keep their eyes on the long run while remaining patient and disciplined with dollar-cost averaging. They contribute the same dollar amounts to their investment accounts in intervals (either bi-weekly or monthly). Then, they’ll buy when the market is down and sell when the market is up. Dollar-cost averaging works best when your portfolio is full of companies showing sustained growth over time.
Analyzing Investment Risk Tolerance
The terms conservative, moderate, and aggressive can mean different things to different investors. What one investor considers moderate, another might consider aggressive, and vice versa. A financial advisor can use multiple assessments or risk score tests to pinpoint your tolerance based on the value of your assets and your investing goals.
Establishing Safety Margins
Highs and lows are also subjective among individual investors. Establishing a margin of safety is imperative to managing risk within your portfolio. For example, if you set a 15% safety margin for yourself, that means you’ll be attracted to an $85 stock whose intrinsic value, you believe, to be worth $100. Larger margins of safety can lead to higher returns while lowering the risk of loss.
Defining a Maximum Loss Plan
When you walk into a casino, you might withdraw $300 and say, “this is how much I’m willing to lose.” Well, your portfolio works similarly. Establish how much you’re willing to risk (and lose) on an investment based on your tolerance for risk.
Insurance Policies for High-Net-Worth Individuals
Another great strategy to control risk is stocking up on a bevy of insurance policies. Basic insurance plans may not be enough to cover the needs of most high-net-worth individuals. Thankfully, there are plenty of policies available on the market that are tailor-made for HNWIs. Such policies protect high-value assets like luxury homes, vehicles, collector’s items, and other lifestyle risks. So what sort of insurance plans should high-net-worth individuals be looking into?
Employee Liability Coverage
Many HNWIs keep several people under their employment outside of a professional business. Nannies, housekeepers, chefs, and drivers are all susceptible to risk on the job, especially injury. Having the proper insurance plans to cover such risks can shield HNWIs from injury lawsuits, should an accident occur.
Life Insurance
Some high-net-worth individuals believe the value of their estate will be enough to support their heirs after they pass. However, if the value of their estate exceeds the exemption threshold, they could lose a good portion of their wealth to estate taxes. Life insurance policies can help soften the loss from estate taxes.
Kidnap and Ransom Insurance
While you hope it never happens, high-net-worth individuals with a public profile (athletes, celebrities, or politicians) should consider K&R insurance, especially if you travel often. K&R policies can save you from losing your fortune should you be held against your will.
High-Value Homeowners Insurance
Homes over $750,000 are generally considered high-value, but some high-value policies may only cover homes worth $1 million or more. These policies may cover more than just the home itself; they also protect the contents within, like antiques, art, and jewelry.
Umbrella Insurance
Think of umbrella insurance policies like an extra safety net. If your other policies don’t cover a claim, umbrella insurance adds an extra layer of protection to your standard liability insurance. Say someone was injured on your property. Your standard homeowner’s insurance may not cover the cost of damages, but umbrella insurance might.
Pillar Four: Debt Management
Living debt-free comes with inherent stress relief. However, most people can’t say they actually live debt-free. Therefore, proper debt management is imperative to financial planning and wealth management. High-net-worth individuals may have outstanding business loans, mortgages, and credit-card debt they’re paying down while simultaneously managing their investment portfolio. So how does debt management tie into your financial future, and how might debt be helping or hurting your investments?
Debt Analysis & Debt-to-Income Ratio
The debt-to-income ratio weighs your monthly debt repayments against your monthly income. Start by adding all your monthly debt payments (mortgage, car loans, business loans). Then, divide that number into your total monthly income (before taxes and deductions). This is your debt-to-income ratio. For example, if your monthly income is $80,000 and your monthly debt is $30,000, your debt-to-income ratio is 26%.
Lenders see borrowers with higher debt-to-income ratios as riskier candidates for loans. A general rule of thumb is the 43% rule, which suggests the highest debt-to-income ratio a borrower can have and still get a qualified mortgage is 43%.
With this in mind, how can you tell the difference between good and bad debt? Which should you pay off first to lower your debt-to-income ratio? Good debt has a low-interest rate and is backed by relatively stable assets (home, bonds, low-volatility stocks). Mortgages and home equity loans are two examples of good debt, as they are backed by real estate. Meanwhile, bad debt comes with high-interest rates and isn’t backed by anything of real liquid value. Credit card debt is the best example of bad debt, with interest rates topping 20% in some cases.
High-interest rates from bad debt cut into your returns margin. You’re unlikely to make returns of 20%, thus you’re paying more in credit card interest than you’re gaining from your portfolio. It’s usually wise to eliminate any high credit card balances before investing in the stock market.
On the other hand, paying down good debt too quickly could also hurt your portfolio. Simply put, you don’t have to pay more than required on good debt since your portfolio returns could outweigh the interest accrued on the loan. A long-term and relatively low-risk investment strategy can outweigh the interest expenses.
Mortgage & Investment Properties Evaluation
If you’re thinking of refinancing a mortgage of any kind, you’ll need to examine the pros and cons of your existing mortgage against the new one. Lower interest rates will most likely draw you towards refinancing, but how could doing so hurt your overall net worth?
A mortgage is a debt instrument used to fund an asset. Many homeowners refinance their homes to lower their monthly payments without considering how it all affects their net worth. But for high-net-worth individuals, mortgages on more expensive homes could actually hurt an overall net worth if such a large expense (plus many years of interest) is not in sync with other cash flow. Calculating both tells you whether or not refinancing is a financially sound idea, and how long you’d have to stay in that home before refinancing benefits you.
Remember, refinancing isn’t free. Consider the cost of refinancing as a deduction from your total net worth. Until the money you save from refinancing covers the cost of refinancing, your net worth will remain smaller than it was at the start.
Restructuring Debt Vs. Consolidation Vs. Settlement
If debt becomes too burdensome or you begin falling behind on payments, there are several strategies you can employ to dig yourself out. Whether you restructure, consolidate, or settle, each debt strategy has different pros, cons, and implications.
Restructuring Debt
Individuals on the verge of defaulting can negotiate with creditors for reduced interest rates and extended repayment periods. Restructuring is a beneficial alternative to bankruptcy for both the creditor and debtor. In bankruptcy, the creditor rarely recovers all of the money owed to them after liquidation. Furthermore, restructuring helps debtors avoid bankruptcy altogether. It’s a win-win for everyone.
Debt Consolidation
When you have multiple loans with varying interest rates, it might make sense to consolidate them into one loan with a single rate. Now you only have one monthly payment to make and one interest rate to worry about. Such loans can be acquired through financial institutions like banks, credit unions, and online lenders. While you might save money on interest, debt consolidation is more about making repayment less mentally taxing. High-net-worth individuals looking for an easier way to pay off their debts could consider consolidation.
Debt Settlement (And Tax Implications)
If you’re no longer able to make monthly payments or have fallen considerably behind, you could opt to settle a debt with your creditor. Settling debt means you’re asking your creditor to accept less than what you owe. If they agree, that new principal will usually be required in a lump sum or a series of payments. Debt settlement is a better alternative to bankruptcy for the debtor, but isn’t always accepted by the creditor, especially if the price is too low. Negotiations also require you to have cash on hand. Creditors want to know you’ll be able to pay the new principal if they agree to your terms.
When it comes to settling debt, it’s important to understand the tax implications involved. After you settle a debt, you will need to pay taxes on the amount you no longer owe. The IRS considers this “other income,” and your creditor should send you a 1099-C cancellation of debt tax notice. The difference will be taxed at your standard tax rate, between 0% and 37%, in 2022.
Secure Your Financial Future—Pair With a Wealth Manager Today
With all things considered, the role of a financial advisor in a high-net-worth individual’s life is invaluable. As stated earlier, having more money doesn’t imply simpler financial planning, it comes with new considerations for you to navigate at every turn.
The complexities of wealth management and financial planning—especially when planning your estate and deciphering the tax code, are best left to those trained in the field. As a high-net-worth individual, consider trusting your wealth management to a professional. Partner with the experts at Polaris Wealth Advisory Group to ensure your assets are in safe hands.
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.
