"For richer or for poorer." While marriage comes to mind upon hearing this phrase, it could just as easily pertain to estate planning. Whether you’re rich or poor, you need to have your estate in order. The difference in planning for the richer and the poorer arises in the estate planning techniques that are implemented. While high net worth individuals have many of the same general concerns as people of more modest means, they must plan for those concerns in a much different and more systematic manner. For example, most individuals (whether of modest or of high net worth) have the same financial goal of minimizing or preventing the federal, state, and local taxing authorities from assessing income, gift, estate, and generation-skipping transfer tax on their income and wealth.

A person of modest wealth may attempt to reduce his or her income tax liability simply by making a few charitable contributions or contributing to an IRA. A person of high net worth may also make many charitable contributions, but is likely prevented from contributing to an IRA due to their high adjusted gross income, which disqualifies them from such a contribution.

Similarly, a person of modest wealth may rely on the gift and estate tax applicable exclusion amounts, or the generation-skipping transfer tax exemption to eliminate their transfer tax liability, whereas a high net worth individual must find additional means to reduce their transfer tax liability on their wealth that exceeds these exclusion and exemption amounts.

Defining “Wealthy”

“High net worth” can be interpreted to define several different levels of wealth depending on individual perspective. Exactly whom are we talking about when we refer to these individuals who require specialized planning? What makes them different from the rest? The term “high net worth” is frequently used in financial literature and is often defined as “individuals with investable assets of $1 million or more.” According to the United States Wealth Report 2015, by Capgemini and RBC Wealth Management, as of 2014, the U.S. had approximately 4.4 million high net worth individuals, which is the highest population in the world and an 8.6% increase from 2013.

You will notice that this definition includes only investable, liquid assets. Also note that this definition does not mention an individual’s level of income. While it is likely that such individuals will have fairly substantial income, it is not a requirement to be considered a high net worth individual. Commonly, people with large incomes will spend nearly every penny, while many people of modest income have saved and invested over a period of years and have become high net worth individuals.

Focus of the Module

For estate planning purposes, the high net worth are concerned with a few key planning situations. First, they want to reduce their federal estate tax liability, as well as their income tax liability. Second, they want to shield their assets and “deep pockets” from potential creditors. Third, since a high percentage of these individuals have their wealth in a closely held business, business succession planning is a necessary component of their estate planning for tax and non-tax purposes.

Author: Cindy Shnaider, MSF

Cindy Shnaider, MSF is an associate professor at the College for Financial Planning. After earning her master’s degree from the College, Cindy began developing and teaching finance and financial planning courses in the College’s graduate degree program, and has continued to do so for over five years. Some of those courses include advanced corporate finance, behavioral finance, and portfolio management. You can contact Cindy at cindy.shnaider@cffp.edu.

Complexity Level: Advanced