The global population of High-Net-Worth Individuals (HNWIs), defined as those with at least $1 million, has increased all over the world, with significant growth driven by the U.S. In fact, there are now more than 5.5 million Americans with liquid investable assets of over $1 million, a 62% increase over the past decade, far surpassing the global growth rate of 38%. By the end of 2023, the ultra-high-net-worth individual (UHNWIs) group totaled 626,600 individuals worldwide, according to the 2024 report. For high-net-worth individuals and families, retaining and growing their wealth is essential. Effective high-net-worth financial planning is essential to achieving these goals.
A financial advisor can help you implement suitable high-net-worth financial planning strategies that focus on wealth preservation and growth. This article will also discuss the key components of financial planning for high-net-worth individuals and their families that can help them maintain their lifestyle, pass on their wealth to their loved ones, and manage their tax liabilities.
Below are 4 essential components of financial planning for high-net-worth individuals and their families:
1. Retirement planning
Retirement planning for high-net-worth individuals requires a different approach than for the average person. As a high-net-worth individual, you are likely accustomed to a certain standard of living, and it is important to plan accordingly to ensure that you can carry on with the same quality of life during retirement. One of the key components of financial planning when preparing for retirement is determining how much money you will require to maintain your current lifestyle. This involves calculating how much you will need per month during retirement and for how many years you will need to fund your retirement. According to research from the Center for Retirement Research at Boston College, household consumption typically falls each year by an average of 0.75 to 0.80% for retirees. However, as a high-net-worth individual, your needs may be different. You are also likely to support your family members, such as children and grandchildren, which could increase your retirement expenses.
Healthcare costs are one of the biggest concerns for retirees, even the wealthy, especially as they age. A study conducted by the Employee Benefit Research Institute (EBRI) concluded that a married couple in the 90th percentile of prescription drug needs must save at least $361,000 to maintain a 90% chance of having enough money to cover their medical bills in retirement. Healthcare expenses, including long-term care, can quickly deplete your savings if not planned for adequately. Contributing to a Health Savings Account (HSA) can help you save for your future healthcare expenses in retirement. HSAs offer triple tax benefits – tax-deductible investment contributions, tax-deferred growth on your money, and tax-free withdrawals for qualified medical expenses. Maximizing contributions to tax-advantaged retirement accounts can also be helpful to ensure you save more efficiently for retirement. As someone likely earning a substantial income, you should aim to contribute the maximum allowable amounts to your employer-sponsored 401(k) and Individual Retirement Accounts (IRAs). These accounts offer benefits, like employer matches, tax savings, etc., that can help reduce your taxable income while growing your retirement savings. For instance, traditional IRAs and 401(k)s allow for tax-deferred growth. But you must note that you will eventually pay taxes on the withdrawals. However, if you have a Qualified Charitable Distribution (QCD) strategy, you can avoid paying taxes on your traditional IRA by donating the funds directly to charitable organizations. This not only supports your charitable interests but also helps reduce your taxable income in retirement. It is also important to consider other sources of income that can help in retirement. One such option is annuities, which can provide a guaranteed income stream in retirement. Annuities can offer peace of mind and a steady cash flow. Additionally, you may consider other sources of passive income, such as real estate, private equity, etc.
For high-net-worth individuals who live in high-tax areas, it may be worth considering relocating to a state with lower taxes for retirees. Some states do not tax income. For example, states like Georgia, South Dakota, Alaska, Nevada, Mississippi, and Wyoming either have no state income tax or provide some kind of tax benefits for retirement income. Relocating to one of these states can help high-net-worth individuals protect their wealth and reduce the overall tax burden during retirement.
2. Legacy and estate planning
Legacy and estate planning are crucial aspects of financial planning for high-net-worth individuals and families. This helps ensure that your wealth is transferred smoothly and efficiently to the next generation. It also ensures that your wishes regarding how your money is used in your absence are honored. One of the main objectives of estate planning for high-net-worth individuals is to minimize taxes and ensure that their assets go to their heirs with minimal tax complications. An estate can be subjected to various taxes, including estate taxes, income taxes, and gift taxes. However, there are several strategies that can be used to transfer an estate to future generations while reducing potential taxes.
One such strategy is gifting. You can gift assets to family members and enjoy tax benefits. The gift and estate tax exemption are a key consideration in this regard. For 2025, individuals can exempt up to $13.99 million from estate and gift taxes. This can be an increase from the limit of $13.61 million for 2024. Married couples can combine their exemptions, totaling $27.98 million for 2025, up from $27.22 million for 2024. Anything above these amounts will be subject to taxation. Additionally, the generation-skipping transfer tax applies when assets are passed to grandchildren or great-grandchildren, but it also comes with a tax exemption of $13.99 million for 2025. High-net-worth individuals should also keep in mind the annual gift exclusion, which allows individuals to gift up to $19,000 per person in 2025 without requiring any reporting to the Internal Revenue Service (IRS). In 2024, this amount was $18,000. High-net-worth individuals can also use a Family Limited Partnership (FLP). An FLP can be set up by a family. It is a formal partnership agreement that includes partners, which are often family members. Family members contribute their assets, such as real estate, investments, etc., to the FLP. Over time, these assets can be transferred by partners to other partners like children or grandchildren.
In addition to this, high-net-worth individuals also need a well-drafted will that specifies who will inherit their assets upon their death. A will may not be the only thing that high-net-worth individuals and families can use. Trusts can offer even more flexibility and control over how your assets are distributed. For example, you can set up a trust that specifies a beneficiary, such as a child, children’s spouses, grandchildren, etc., and how the funds can be used by them. Trusts can also help protect your assets from potential creditors. There are different types of trusts, such as revocable trusts and irrevocable trusts. When together, trusts and will are efficient in managing large estates and avoiding probate.
High-net-worth individuals also need to plan for future scenarios, such as incapacitation. This can be done through powers of attorney. There are different types of powers of attorney. For example, a durable power of attorney enables someone you trust to take your estate’s financial and legal decisions if you are unable to do so yourself. On the other hand, a healthcare power of attorney (HCPA) allows an agent to make healthcare decisions on your behalf if you become incapacitated.
3. Risk management
With significant wealth comes the risks. High-net-worth individuals may face unique and more complex risks than the average person. From market volatility to the threat of lawsuits and property damage, wealthy individuals must implement comprehensive risk management strategies to safeguard their wealth and ensure its continued growth.
Diversification is one of the first things you can do for risk management. Instead of relying solely on stocks or bonds, wealthy individuals should diversify across various asset classes, including real estate, alternative investments, currencies, commodities, hedge funds, cryptocurrencies, and even private equity. This helps to reduce the impact of market volatility and ensure that your wealth is less susceptible to market downturns. Insurance is another essential tool in protecting high-net-worth families against financial risks. Wealthy individuals should consider more specialized forms of coverage beyond the typical home, auto, and health insurance to protect their assets. Property insurance for valuable assets like jewelry, art, antiques, or collectibles is vital. High-net-worth individuals may own rare collectibles and luxury assets like yachts or private planes, and a specialized insurance policy can safeguard their assets from unforeseen events like fire or natural disasters. Life insurance can also be essential to provide financial protection for loved ones.
It is important for high-net-worth families to identify hidden risks like cybersecurity. High-net-worth families are increasingly becoming targets for cyberattacks due to their popularity. Wealthy families need to take measures to safeguard their personal information. Working with cybersecurity experts can help mitigate this risk.
4. Collaboration with a wealth manager
Working with an expert who specializes in different areas of high-net-worth financial planning can ensure that all aspects of your wealth are properly managed and aligned with your present and future financial goals. Given the fact that most high-net-worth families have intricate financial needs and estates, it is important to hire more than one expert. Collaborating with a team of skilled financial professionals like tax planners, insurance experts, investment managers, etc., can ensure that all aspects of your financial life are carefully considered and that you are on track to achieve your financial goals without any diversions. A financial professional can also guide high-net-worth individuals and families during significant life events such as marriage, divorce, or retirement. They can make adjustments and regularly review your financial plan to ensure you stay on track to meet your evolving financial goals.
For instance, you can work with a financial advisor if you are looking for comprehensive financial planning and investment management. These professionals can recommend suitable strategies based on your net worth, risk tolerance, and specific goals. They can help you diversify your portfolio and lower risk to ensure your portfolio continues to grow and cover your lifestyle both before and after retirement. It can also help you to hire a tax professional to optimize your tax situation. High-net-worth individuals and families fall into high tax brackets. They are likely to earn high profits, which results in high capital gains tax. The value of their real estate assets can also be high, resulting in a steep property tax. Tax professionals can help with tax planning and employ strategies that help lower your taxes, preserve your hard-earned wealth and assets, and ensure compliance with tax laws.
High-net-worth families also need assistance from estate planning attorneys. This can be essential for creating and updating your estate plan. These professionals can ensure your assets are transferred according to your wishes. They can also provide advice on setting up a will, trust, power of attorney, and other similar tools to protect your estate and leave a legacy behind for your loved ones. Additionally, high-net-worth individuals and families may also need to get help from an insurance specialist. These specialists can help address your insurance needs, including life, health, property, and liability insurance.
To conclude
High-net-worth financial planning strategies are essential for individuals and families who want to grow and preserve their wealth. Because of the substantial value of their assets, the strategies used by high-net-worth individuals differ significantly from those of others. Their financial setups are often more complex, with multiple investments and assets to manage. This makes it more challenging to keep everything on track. In such cases, working with a financial professional becomes crucial. A financial advisor or wealth manager can provide the expertise needed to manage large estates and help high-net-worth individuals and families protect their wealth.
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