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hether you are wealthy or not, you need to have your estate in order. The difference for the richer and the poorer arises in the estate planning techniques that are implemented. High net worth individuals have many of the same financial obligations as people of modest means, but they must plan for those concerns in a much different, and more systematic manner. For example, most individuals 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. But, the details of these tax-minimizing goals are drastically different for wealthy and non-wealthy individuals.
A person of modest wealth may attempt to reduce their income tax liability by making charitable contributions or deducting the contributions to an IRA. A person of high net worth may also make many charitable contributions, but this person is likely prevented from deducting contribution to an IRA due to their high adjusted gross income, which disqualifies them from such a deduction if they are also covered by an employer-based plan.
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 may need to find additional means to reduce their transfer tax liability on their wealth that exceeds these exclusion and exemption amounts.
Defining "Wealthy" 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.
Notice that the provided definition for the term "high net worth" includes only investable, liquid assets and that this definition does not mention an individual's level of income. While it is likely that high net worth individuals will have substantial income, it is not a requirement. 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.
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.
About the Author
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, covering such topics as advanced corporate finance, behavioral finance, and portfolio management. You can contact Cindy at firstname.lastname@example.org.
Complexity Level: Advanced