Council Post: Holistic Planning Is Key For Top Earners In Light Of Tax Hike Proposals

Sheraz Iftikhar is the President and Chief Executive Officer of Arch Global Advisors.

High-net-worth individuals in the U.S. could see an increase in their taxes in the near future. President Joe Biden recently announced that he wants to fund his $1.8 trillion American Families Plan primarily by increasing taxes on the wealthy. This plan seeks to expand education and child care benefits, among other things.

As someone whose career focuses on helping ultra-high-net-worth individuals (UHNWIs) with their financial strategy, investments and retirement planning, I’ve heard from many people who are unsure of what financial actions they should take in light of Biden’s tax plans. Their concerns focus on proposed increases to income tax, capital gains tax and estate tax; market volatility; the proposed elimination of the step-up in basis; and their retirement funds.

Integrative planning is crucial for UHNWIs looking to grow their assets. Early investing is one of the best ways to expand your estate and wealth more efficiently; however, many individuals only look to start planning once they feel they have enough assets. This thinking can be detrimental to your tax planning strategy and can waste a substantial opportunity. As an UHNWI, you must start implementing your plan with your initial and/or new wealth.

Areas Of Concern

A fear I see from UHNWIs is that the income tax rate for those in the highest income bracket could one day return to what it was from the late 1930s through the 1970s when the rates were 70% or more and in some cases over 90%. Biden’s plan would increase taxes back to 39.6% for these individuals.

UHNWIs invest primarily in the U.S., from what our firm sees, but can potentially have foreign investments that generate income. Before the Obama administration, some UHNWIs preferred to have offshore accounts, which helped them avoid paying taxes on foreign assets and income. While Obama was in office, the Foreign Account Tax Compliance Act was passed, which requires foreign banks to report on U.S. account holders. This law targets non-compliance by U.S. taxpayers using foreign accounts since the U.S. government now requires U.S. citizens, green card holders and resident aliens to report their worldwide income and pay taxes on it.

A portion of an individual’s profit through different investments can qualify as capital gains. UHNWIs frequently utilize capital gains-related strategies to minimize their tax liability because the top capital gains rate is 20%, which is much lower than the highest ordinary income tax rate.

When a beneficiary of a UHNWI receives an asset, its value is typically higher than when it was bought. However, these assets receive a step-up in basis, allowing the higher value to become the cost basis for the beneficiary and minimizing capital gains tax.

It is also essential for UHNWIs to educate themselves about estate tax, an inheritance tax that has to be paid once a beneficiary receives assets. The Tax Cuts & Jobs Act increased the estate tax exemption, which is currently $11.7 million per individual — meaning anything inherited above $11.7 million will be taxed at a 40% tax rate. The threat of the estate tax looms over the long-term growth of UHNWIs, as a significant portion of their wealth can be lost through inheritance due to these taxes.

Another tax planning key for UHNWIs is to take a look at their retirement funds, so they can try to avoid losing a sizable portion of their income at retirement. For example, athletes have a short-term career and a relatively long retirement. An expensive lifestyle, inflation and taxes are real threats to their retirement well-being if they don’t manage their wealth correctly.

Holistic Planning And Putting Together Your Advisory Team

Like many other investors, UHNWIs go through a financial cycle of wealth creation, wealth preservation and wealth transfer. Their financial road map may look different than others, but it must still emphasize making each phase successful while allowing the individual to achieve their short-term and long-term goals. However, it’s particularly important that you take an early initiative in putting an integrated plan in place that not only takes your current financial status into consideration but can also anticipate your wealth growing exponentially in the future.

Now is the time to make sure you have a holistic financial plan. One way to do this is to put together a trustworthy team of advisors to help you develop a long-term asset allocation plan. Essential members of the team include financial advisors, estate and trust attorneys, business attorneys and accountants. It’s not necessary for these professionals to be part of the same organization, but it’s imperative for them to coordinate, communicate and work in tandem to find the best solutions for you. The team’s experience and knowledge should help you navigate market volatility, economic cycles, changing regulations, tax implications, litigation, etc. One quality you should look for when putting together your financial team is trustworthiness. You need to make sure the professionals you work with are reliable and have your best interest at heart.

Time is one of the most important commodities, and this is especially the case with UHNWIs. Due to time constraints, UHNWIs tend to not be actively involved in the ongoing management, monitoring and annual review of their financial plans. Make sure you are involved with the planning and implementation phase of your plan. It’s equally important to be involved in the ongoing management of your plan. This can be done by reviewing your plan annually.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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