Wealth Strategies

An Overview of Wealth Strategies

Our work with clients stretches across many years, many investment climates and many cultures. The experiences of our clients have suggested to us certain guiding principles that should be considered when planning for wealth management and succession. We offer these to complement, or challenge your own thinking.

Control v. ownership.   Success can be achieved by controlling wealth, not only by owning and consuming it. Trusts and charitable foundations are perfect examples of controlling assets without ownership when they are properly structured.  The concept of control without ownership is difficult to appreciate, particularly without the benefit of prior personal experience, but we believe it is essential to creative, tax-efficient wealth management.

Global Perspective.   Think and act globally. Economic opportunities in this new century, and the businesses that create them, will continue to cross borders and grow outside their country of origin.  Promising lives and careers will follow economic globalization.

Wealth Creation.   Wealth preservation requires serious attention to further wealth creation.  The financial status quo can be eroded by growth in the family, unavoidable levels of tax, and declines in the relative performance of investments.  Of these factors, the last is the most avoidable.  Everyone recognizes that the future prospects for a family-controlled business, or a concentrated stock position, cannot be judged entirely by the successes of the past.  Conscious discipline is necessary to avoid falling into the grip of inertia.

Wealth Succession.   As a corollary principle, the need for management succession planning is not limited to active businesses, but also includes all circumstances where younger generations will inherit control of wealth. Succession in the ownership or control of wealth can be more carefully managed if it is gradual and begins early enough to allow for adjustments to address the mistakes that accompany almost all transitions. Passing some assets to the next generation at a time in their lives when they can actively manage that additional net worth over a long-term horizon can also promote financial maturity. Completely postponing a transition until events force a change is more likely to lead to misunderstandings, oversights and disappointments. Paradoxically, many of these risks are often overlooked or neglected because they are so obvious.

U.S. Estate Taxes.   U.S. wealth transfer taxes demand three primary defensive strategies for people with substantial assets. First, allocate high risk, high reward investments to the youngest generation as early as possible, and consider making gifts for this purpose if necessary. Second, pool investment resources to curb impulse investing, facilitate diversification, and reduce taxable value for wealth transfer tax purposes. Third, make a realistic prediction of whether U.S. estate taxes will actually be repealed for a meaningful period of time, and then adopt a plan that takes the prediction into account but also includes a hedge against the risk that the prediction is wrong.

Simplicity.   Wealth management is a complex undertaking. Simple strategies and casual advice are rarely enough to produce the best investment and tax results. Tomes have been written about wealth management and the Tax Code is thousands of pages long. While simplicity is a virtue, it should not be the only criteria for evaluating a plan. Moreover, the administrative burden of dealing with complexity should be largely the responsibility of your advisors. If that complexity clutters your desk, it may be that your advisors, not your planning, need to be more responsive to the goal of simplicity.

Decision-making.   Wealth management, including tax planning, requires a decision-making process that is more like that needed for an active business than a passive portfolio. In evaluating a plan, there are various intangibles that must be considered. What is the level of risk of a bad result, and will a good result require that you tolerate an unacceptable level of uncertainty for an extended period of time? Does the strategy require you to change your personal views on how to manage wealth for yourself and your beneficiaries? Do you have to be, or want to be, personally involved in managing the plan or its consequences? Does the plan require or create liquidity now or at some time in the future, and is that desirable, realistic, and consistent with your other goals? In evaluating a plan, you should not ignore these kinds of factors just because they are difficult to measure.

Litigation Risk.   Litigation is not an end, but it is a means. In the United States today, litigation risk is a hazard that must be managed and cannot be ignored.  Those who have had their first experience with serious litigation in the U.S. courts may conclude that it represents the ritual equivalent of mutually assured destruction.  Everyone is unhappy at the end of the process.  Everyone loses, even the winner.  This suggests that litigation should never be viewed as the solution of first resort.  On the other hand, if you are never prepared to assume the risk of litigation under any circumstances, at some point you may well have to forego achieving your best result in business and financial affairs.  A categorical unwillingness to risk litigation is understandable, but it also tends to lead to premature compromise that falls short of reasonable objectives.

Investing In “ Intangibles. ”   Several intangibles -- including confidentiality in financial affairs, long-term governance, and the talents, needs and potential of individuals -- warrant as much attention in planning as investment returns and tax savings. As the adage goes, athletic coaches cannot teach speed and agility, but their efforts improve performance nonetheless. Similarly, experience gained from good coaching and role models helps younger people make more thoughtful choices in their personal and financial lives.