Year-End Tax Planning for Family Office Wealth Management

Life, death and taxes are all you can be certain of, so it’s best to keep up with financial strategies for all three. In fact, that is the simplified definition of family office wealth management. As a new year is on the horizon, now is the ideal time to check your tax planning strategies to account for the unique challenges – and opportunities – that ultra high-net-worth families face.

Estate Tax Challenges for Ultra High-Net-Worth Families

One of the primary goals of family office wealth management is financial protection. Because ultra high-net-worth investors are subject to higher tax burdens, strategic tax planning is crucial.

man putting down block with dollar signs for accumulated family office wealth management plan - stablefordThe higher taxes come from four major areas:

1. Income
2. Investment gains
3. Real estate sales and/or income
4. Estate value – including collector’s items like artwork and vehicles, investment assets, and inherited property

For those working with $30 million or more (an ultra high-net-worth individual), that’s a lot of moving parts to keep track of. That’s why a family office partner is so important – to not just keep tabs on the assets, but to make sure all the moving parts are working together and working for you. Enter tax planning strategies.

The biggest tax challenge to family office wealth management is the estate tax. In 2019, a 40% federal estate tax applies to estates after reaching an $11.4 million value. Plus, some states also charge an estate tax and/or an inheritance tax; the percentage ranges from 1-16%.

So for an estate valued at $40 million, the 40% federal tax will apply to $28.6 million. That’s $11.5 million paid in federal estate taxes and gone in an instant, plus the state estate or inheritance tax. The goal then is to avoid as much of the estate tax as possible by doling out assets strategically.

Allocating Assets and Income

multigenerational family walking on beach for family office wealth management blog Most ultra high-net-worth investors have extra assets accruing capital gains tax. There are several ways to re-distribute the assets and lower the taxes, such as gifting assets to lower-income family members. When gifting to adults, they will owe the taxes on the income generated by the gift, but at a lower rate. When gifting to underage individuals, you will be responsible for the taxes from any dividend and interest income, but at the individual’s lower rate.

Consider charitable giving, in the form of publicly traded securities. These are free from the capital gains tax if they have increased in value after being donated to a qualified charitable organization.

Adding assets to a life insurance policy is another option, since this is tax-exempt. You don’t pay taxes on any generated income from the policy, and the income is tax-free to your beneficiaries after your estate is settled.

Another family office wealth management strategy is to split income amongst family members, particularly shifting income to lower-income, and thus lower tax bracket, members. This could reduce a family’s tax burden by thousands of dollars.

Life Events that Affect Family Office Wealth Management

Major life changing events, such as receiving an inheritance or struggling through a serious illness, can shake up a lot of emotions, but shouldn’t shake up a solid family office wealth management plan.

family office wealth management risk control management with man protecting wooden blocks from falling down - Stableford

The good: When a positive life changing event happens, celebrate! Then consider these three things:

• How it will it affect the family office – will you integrate any new assets in or involve your family in other ways?
• Will it change your tax burden?
• Is it best to use any additional funds immediately, or invest them?

The bad: When a negative life changing event happens, trust in your family office partner and your wealth management plan. It’s always easier to plan ahead in the event of financial fallout than to scramble picking up the pieces in the aftermath of a tragic event.

Ultra high-net-worth families utilize a variety of investment vehicles and usually carry many assets, so the repercussions of any life changing event will take time to process. The best line of defense is advance planning.

To that end, it is highly advisable to update family office wealth management plans every quarter.

As your family office partner, Stableford is by your side through the good and bad events, advising on the best tax planning strategies to protect your family’s wealth. That is simply part of our integrated advisory approach. Ultra high-net-worth families are especially prone to major effects of change, so it’s important to be prepared. To review and update your family office wealth management plan before the new quarter, contact Stableford at 480.493.2300.

Mark Barone
Mark Barone
Mark Barone has been a tax and accounting specialist for over 20 years. After graduating from the University of Iowa, he joined KPMG as an associate in Chicago before moving to Phoenix in 1998 to work with Deloitte. Barone then transitioned into private practice, and in 2016, he helped to launch Stableford Tax.

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