Making the Most of Your Investments to Provide for Your Legacy
With time, savings and discipline, anyone can build enough wealth to retire. You carved your own path. Whether you built a business, climbed the corporate ladder or grew your wealth another way, through your talents and experience you were able to accumulate significant assets.
That level of wealth, though, comes with complexity—serious tax bills, a sea of investment options and a meaningful legacy to pass along someday. You need a wealth manager who excels at their craft to help you successfully navigate it. The right wealth manager can take on some, most or all the responsibility of growing and maintaining your wealth, giving you more freedom to live the life you built. You made your fortune—enjoying it is your reward.
Chances are you have a financial team in place already. You may have an extensive financial plan, but even the best plan can have a blind spot—a gap that can let money flow out of your portfolio. Your wealth manager needs to have a deep level of knowledge across portfolio management, tax, estate and other financial planning services, plus, know your personal situation and goals intimately to help identify and rectify these gaps. Not just any wealth manager can help. To keep your wealth from draining away, they must be able to support the following areas.
Tax Planning
As your wealth increases, so does the intricacy of managing your tax liabilities. Working with your wealth manager on tax-efficient investing, tax-reduction strategies, capital gains evaluations and business tax planning can help you keep more of your wealth. They should be capable of a comprehensive tax analysis and tax return review—understanding what you’ve paid before may help find opportunities to improve your tax situation.
Estate and Legacy Planning
Thorough estate planning covers the full scope of your assets, investments, financial strategies, business interests and charitable giving. But having the plan isn’t enough. Your wealth manager should evaluate your plan to help ensure it reflects your wishes and use it to inform how they manage your money—helping you achieve the legacy you want to leave.
Strategic Philanthropic Planning
Philanthropy can help you support causes you care about and minimize your tax burden. With the right tools—charitable trusts, foundations, donor-advised funds, gifting securities, etc.—you can have a tremendous impact today and on future generations.
Tailored Investment Strategies
Some wealth managers who specialize in serving high net worth investors recommend portfolios of exclusive investment products that require significant investment just to gain access. Don’t mistake exclusivity for what is appropriate for you. A wealth manager with your interests at heart should tailor your portfolio and investments to your unique financial situation, goals and needs.
Social Security and Healthcare Evaluation
Maximizing your Social Security benefits in retirement starts with understanding your options. Your wealth manager can review your situation to help you decide when it makes sense to start drawing your benefits. They should also be aware of your health insurance needs and help you understand how your Medicare options can provide coverage when you need it most.
At Fisher Investments, we understand your tax, estate, philanthropic and investment strategies must reflect your unique situation and work in harmony—or you risk leaving significant wealth on the table. This guide describes strategies highly affluent investors like you can use to help achieve your goals and prepare your wealth to last for generations to come.
Tax-Aware Portfolio Management
As your income and wealth increase, so will your tax burden. Managing taxes is key to maximizing your wealth so you can achieve your long-term goals. Tax-smart portfolio management starts with tailoring a plan to your unique situation, which may include:
Strategic Account Registration
Whose name—or the tax ID—your investment accounts are under can have a big impact on your taxes. If you’re a business owner, you’re likely familiar with using a Limited Liability Company (LLC) to separate and protect your personal and business assets. LLCs are considered “pass-through” entities—where, instead of at the entity-level, profits pass through to the owner(s) of that business and are taxed at the individual tax rate. Registering investment accounts and owning assets through your LLC could be one way you can build your wealth while avoiding double taxation.
The Family Limited Partnership (FLP) is another structure that can provide tax benefits and legal protections while facilitating the gradual transfer of wealth across generations. When creating an FLP, family members pool their assets to fund a new or existing business or holding company, then divide ownership into shares. Like LLCs, FLPs also separate business assets from personal, but unlike LLCs, general partners of an FLP could be personally liable for its debts. Combining the use of an LLC and an FLP can provide liability protections for the general partners while still enabling the transfer of wealth. Most importantly, from a tax perspective, partners can gift FLP interests, often at a discounted value and tax-free up to the annual gift-tax exclusion. Business profits and growth are also not considered part of your estate.
Your wealth manager may also be able to manage assets in trusts, which can be helpful in reducing your taxes. For example, placing assets in an irrevocable trust removes them from your taxable estate. Those assets can then grow without affecting your tax situation or your estate’s. The assets are held by the trust until they pass to your beneficiaries, either at the end of your life or another time you choose. You won’t have access to the assets in your irrevocable trust, but they may still be able to pay you income during your lifetime. Take a closer look at how various trust instruments can also help you create a more tax-efficient estate plan on page 16.
Before spending the time and resources to create new business entities, make sure you’ve also considered simpler solutions. Even more basic account registration decisions involving joint tenancy with right of survivorship (JTWRS) can lead to significant tax savings. If you’re not familiar, JTWRS is a legal arrangement in which two or more people equally own an asset, such as a house or a financial account. If a married couple owns an investment together under a JTWRS, when one spouse dies, the surviving spouse may receive a “step-up” in cost basis on 50% – 100% of assets held in JTWRS, depending on state law, calculated from the date of death rather than purchase date.
Cross-Border Considerations
If you spend significant time abroad, own foreign assets, operate a global business or have multiple citizenships, your tax situation can be complicated. Your wealth manager should be well aware of where your accounts, investments and business interests are domiciled. Ask if your financial team has deep experience with international investments, currency considerations and laws governing a global lifestyle and finances, such as the Foreign Account Tax Compliance Act (FATCA) and passive foreign investment company (PFIC) ownership rules. Your financial plan should be able to adapt to your global lifestyle.
Tax-Smart Investment Strategies
You are probably aware that your investments can trigger taxable events in multiple ways:
- You incur capital gains taxes when you sell investments that have appreciated in a taxable account.
- You may owe income tax when an investment pays dividends, when you receive interest payments or when you withdraw funds from a retirement account.
- If you inherit investments, you may not owe taxes on the assets you gained, but the subsequent earnings, interest, dividends and distributions may be taxed—how can vary widely, state to state, and person to person.
The sheer number of ways investing can contribute to your tax bill makes it critical you work with a wealth manager, like Fisher Investments, who can help you limit taxes on your portfolio’s investment returns.
Tax-Efficient Investments
Certain investments have qualities that make them relatively tax-efficient. Some are more commonly known: municipal and federal government bonds, whose interest payments are typically exempt from federal income tax, and equity exchange-traded funds (ETFs), which can have fewer tax implications than other kinds of funds.
More adventurous or sophisticated investors may look to alternative investments for tax efficiencies. Private equity or real estate funds may offer you the ability to be a part-owner. In those cases, you may receive tax benefits such as pass-through depreciation and the ability to treat some investment income as long-term capital gains. However, alternative investments can be quite complicated. Each is unique, and many may require locking up your money in the investment for years. And not all alternative investments offer tax efficiency—for example, income from hedge funds and venture capital is typically taxed at your highest income rate.
That’s why we often recommend not overcomplicating your investment mix. If you have significant wealth—say, $5 million or more—holding individual stocks can actually be very tax-efficient when managed properly and paired with strategies such as tax-loss harvesting.
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