Do you have a “junk drawer” in your house? It’s the drawer that you might turn to when you need to grab some batteries for the TV remote, or when you’re looking for that receipt you hung onto just in case you needed to make a return. It could be filled with spare change, extra pens, or old cell phone chargers. The truth is, most of us have some form of a junk drawer in our home where things just tend to accumulate.
Many high net worth individuals have another junk drawer in their life—a financial junk drawer. Rather than containing household items, this metaphorical drawer is filled with old IRAs and 401(k) plans, company stock from a previous employer, maybe even an old life insurance policy or annuity.
This is part of what makes wealth planning for high net worth individuals a unique challenge. Your portfolio is likely complex and full of investments and assets that reflect your extensive career and hard work over the years. The problem with holding these items in a disorganized manner is that they become extremely difficult to manage. As a result, you can’t optimize each of them to their full potential to maximize your financial situation.
This is one of the many reasons why developing an integrated financial plan is so critical for high-earning executives. By developing an integrated plan with an executive financial advisor, you can effectively consolidate your financial accounts and streamline your entire financial planning process. Here’s a closer look at the wealth planning areas that likely make up your financial junk drawer, and how they can be optimized with an integrated financial plan.
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Wealth Planning for High Net Worth Individuals: Areas to Consider
As a high net worth individual, you have a more complex financial situation and, therefore, have a need for specialized wealth planning. Let’s take a deeper look at some areas of planning that may require individual attention.
Equity compensation planning: If you are a top-level executive, you are no stranger to forms of equity compensation such as stock options and restricted stock units. Have you considered how these equity holdings factor into your overall financial plan?
For example, we often see executives develop a highly concentrated stock position with a low cost basis. This is certainly an issue, especially if you aren’t thrilled about paying a large sum in capital gains tax to diversify that position. When you work with a financial advisor to integrate your equity compensation plan into your overall financial plan, you can better identify that concentrated position and implement strategies to balance and diversify it in the most tax-efficient way. For example, an exchange fund and an index proxy strategy are two methods that limit the amount of capital gains taxation you must pay to diversify your position.
Asset allocation: In the same way that many high net worth individuals develop overly concentrated stock positions, they can just as easily hold other assets that create an imbalance in their financial portfolio. This is one of the reasons why it is important to review your asset allocation at least on a quarterly basis—and possibly more often if you own a large position in one particular stock—to account for market volatility. Some corporations require their C-suite executives to hold a certain amount of company stock, adding another level of complexity when it comes to strategizing your asset allocation.
When you have an integrated financial plan, however, you and your advisor can keep a bird’s eye view of your entire portfolio and all of your assets within it. In doing so, you can ensure your asset allocation is optimized to balance your overall portfolio and reduce risk while adhering to requirements like holding a certain amount of company stock.
Charitable gift planning: Many high-earning individuals have a strong desire to donate to charities they feel passionate about. When you carry out these charitable giving wishes as part of an integrated financial plan, you can employ strategies to maximize your charitable contributions while minimizing taxation.
For example, we’ve helped clients identify highly appreciated stock [link to Handling Highly Appreciated Stock post] within their portfolios to donate to charity. This strategy can help you avoid paying capital gains tax on the stock, which you would be required to pay if you sold the stock outright and donated the proceeds. Donating the stock directly gives the charity a larger donation and gives you a larger charitable donation tax deduction.
Estate planning: Lastly, estate planning is important for all high net worth individuals to consider. And, the sooner you plan for this, the better. As the size of your estate continues to grow, so does the complexity of rules and regulations that need to be addressed by both a trusted financial advisor and an experienced estate planning attorney. The two advisors working together will help you integrate your estate plan into your overall financial plan.
For example, we have identified appreciated stock “laying around” in a new client’s portfolio that would cost them capital gains tax to sell. So instead, we’ve recommended passing it on to their kids as part of their estate plan. When you employ this strategy, it allows your kids to enjoy a “step up basis,” which means they can sell the stock at a later date with a much higher cost basis than you originally had. With an ever-evolving estate tax exclusion amount, an estate plan as part of your integrated financial plan should be reviewed annually at a minimum.
All of these areas can bring with them their own baggage from prior planning, further adding to your financial junk drawer. Working with an established and effective financial planning team can help you to fully integrate and optimize your strategies to develop a more cohesive overall plan.
Developing an Integrated Financial Plan
If this discussion has you thinking about your financial junk drawer, don’t feel bad—the commonality among wealthy individuals is the main reason we are covering this topic. The truth is, when it comes to wealth planning for high net worth individuals, we’ve only scratched the surface with the considerations we’ve discussed here. That’s why developing a custom integrated financial plan with the help of an experienced executive wealth manager is truly the best way to declutter that drawer and work toward the financial well-being of yourself and your family for years to come.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for developing integrated financial plans for top-level executives.
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