So You Wanna Be Rich
The ultra-wealthy have unique financial planning challenges—as well as concerns about personal safety and security. Local wealth advisers talk kidnapping concerns, fast cars and more.
Kimberlee Orth is a private wealth adviser for Orth Financial Group in Wilmington.//Photo by Jim Coarse
It is impossible to watch just about any TV program these days without seeing an advertisement for some new medication designed to control a disease, eradicate a condition or manage an illness. Researchers have discovered ways to prolong our lives and to keep things that used to kill Americans in their 70s from doing serious harm.
Because of that, we are living longer, fuller lives. People in their 80s are still working and doing things that were unheard of before.
Fred Dawson sees all of this and has mixed feelings. The long-time financial adviser for Wilmington-based Bassett, Dawson & Foy is glad people are living longer, but he knows there is a downside to the increased longevity.
“I don’t think most Americans realize the good news and bad news,” Dawson says. “The good news is that we’re living longer. The bad news is that we’re living longer with the high cost of healthcare, and the great unknown of the government not being able to take care of us. People have to make sure they don’t run out of money.”
Even some of the wealthiest citizens can’t be certain they have enough cash to make it to the finish line in relative comfort. Funding Medicare supplement insurance and prescription drug plans isn’t inexpensive. Paying the astronomical costs of long-term care can be a huge burden. No matter how much money people have, they are still going to get sick and have other physical problems. Dawson says some Americans aren’t necessarily going to be happy that they’ll be living so long, especially if it costs too much.
Dawson and other advisers believe it is imperative for everyone to plan for health issues down the line. Those people who have significant wealth have more work to do than just that. They must commit to a process that covers a variety of situations specific to them. Someone in the middle class—or even upper middle class—doesn’t need to worry that much about blackmail and kidnapping. High-net worth individuals do. Their estates are more complicated. Their insurance needs are greater. They want to keep their asset pools growing, but they want to avoid risky investments that can produce negative results. According to Michael Sicuranza, president and senior financial adviser at Affinity Wealth Management in Wilmington, one word applies:
“Tax, estate and asset protection strategies are needed more often than not at the high-net worth level than someone who has done well for themselves but is not at the high-net worth level,” Sicuranza says. “Everyone needs planning and someone to guide them to live their best life possible, but high-net worth families have more strategies at their disposal.”
The more money one has, the higher the level of sophistication in planning. As Sicuranza says, there are more strategies available because there are more facets to individual portfolios, more products in play due to the larger amounts of money and greater possibility of risk in the present and future. High-net worth individuals face a variety of challenges that others never have to consider, and many of the issues are not obvious.
Owning a fancy sports car is fun, for example, but its ability to operate at speeds beyond those of ordinary vehicles can create myriad insurance concerns that aren’t germane to most other Americans. Family relationships can be strained greatly when estates are divided, thanks to children’s desires for larger shares of the assets or hopes of inheriting specific items. The increased number of variables leads to more important and potentially sticky conversations and a greater level of planning.
“There are some things unique to high-net worth individuals,” says Kimberlee Orth, a private wealth adviser for Orth Financial Group in Wilmington. “Mostly, it’s about estate planning and legacy.
“Your legacy is how you want to be remembered for the time you spent on this planet.”
Take Michael, for example. Michael (not his real name) always needed a little more than his siblings did. For whatever reason, his business ventures didn’t work out, his employment pursuits weren’t successful, and he just couldn’t get things together well enough to move forward financially. Compounding matters were his children, whom Michael’s parents adored and couldn’t possibly allow to suffer.
So they funneled money to him over the years. When it came time for discussions regarding their estate and how best to distribute the assets after their passing, a couple of Michael’s siblings weren’t too happy that there would be an even distribution of the wealth.
“He got more while you were living,” one said.
It wasn’t an easy conversation, but it had to happen. Instead of writing a will in a vacuum, the couple decided to let the entire family into the discussion. It wasn’t a democratic process, but it did let everybody know what was going to happen.
“It helps the children if you do address it before things get too far along,” Orth says. “Even if you have to say that you can’t watch your grandchildren from Michael live in a box under a bridge and that you had to buy them a house. You can say, ‘This is how my brain has worked over the years.’ A lot of times, people can’t bear thinking about their grandchildren having problems, because they are so precious.”
Because there are so many ways to help high-wealth individuals shelter their assets, protect themselves from taxes and make sure their heirs receive a proper share of the pie, that portion of estate planning can be relatively pain-free. Sure, it’s complicated, but there are solutions. The harder part comes when family members are brought into the discussion. Because of various rivalries, family history and other factors, such as second (or third) marriages, figuring out who gets what at the end of the line can sometimes be fraught with hurt feelings, anger and, at times, severed relationships.
“One of the things I stress with my clients is that maybe you don’t have to be equal to your heirs, but you have to be fair to your heirs,” Dawson says. “You’ll see a family with multiple children, and invariably the parents have given more to one over the years, and some have never had anything given to them. You need to determine what is fair for each.”
Bill Erhart, a certified elder law attorney who works for Estate & Elder Law Services in Wilmington, has seen plenty of situations turn acrimonious because of difficult conversations about estates. The fallout can tear apart even the strongest family relationships.
“If you have a blended family, there are children and other relations, and that can cause problems when it comes to money,” Erhart says. “It can be difficult.”
That’s why discussing things early and coming up with solutions ahead of time is so important. That may cause a bit of short-term trouble, as the various parties try to make sure their wishes are respected, but it can prevent long-term acrimony by establishing protocols that supersede any claims. That way, when parents die, the path forward is clear and direct.
Erhart describes an example in which a couple is living off the husband’s individual retirement account. Each spouse has children from a previous marriage. By establishing a retirement trust, the husband can make sure his wife gets full access to the IRA funds if he were to die before her, but after her death, the money would go to his children. “You don’t want your [second] wife’s children managing your assets,” Erhart says.
There is no law that prevents someone from passing assets on to children of second spouses, but in many cases, a husband or wife prefers to make sure the bulk of his or her assets pass on to biological offspring. These are often concerns of high-net worth individuals. Greater assets means more decisions to make than ordinary Americans may have. And it’s not just a matter of the next generation. Sicuranza describes some high-net worth individuals who use dynasty trusts to keep money in their children and grandchildren’s hands in the event of future divorce, bankruptcy and litigation. By establishing trusts, assets are out of people’s names, but still within control of those who should be exercising it. “John Rockefeller once said, ‘Own nothing but control everything,’” Erhart says.
Trusts are great ways to protect assets. Another way for people with significant worth to ensure that their money and property are protected is by taking advantage of the new, enlarged gift and tax exemption. It had been $5.5 million, but has swollen to $11.2 million, which means people can give away sizable chunks of their estates before they die, because gift tax rates are lower than estate rates. People want to be careful not to give away too much, because no one can tell how long he or she might live, and it’s never a good idea to come up short on living expenses and healthcare. Even individuals with significant asset pools must consider the costs of maintaining properties and other items, along with basic living costs. Still, giving away money while still alive can save heirs tax money.
“When I give away $1 million, I pay gift tax,” Erhart says. “If I die, and my heir gets a million bucks, the person receiving the money pays tax.”
When Kevin Thomas begins to get resistance from clients and prospects who have great wealth and an unwillingness to understand—and protect themselves from—the many risks they might be facing, it’s time for him to get scary.
“We need to share some war stories,” Thomas says. “We have to give them some claims examples.”
The COO of Lyons Insurance in Wilmington has some pretty interesting tales of woe (and success) from those who have faced circumstances that would be practically impossible to predict.
Take the parents who lived in a golf course community. They gave their teenage son a souped-up golf cart for his 16th birthday. He was having a grand time bombing around the property with his friends—until he hit a bump. One of the young passengers was thrown from the cart and hit his head on a rock, causing brain damage. The average person living in a modest house and ordinary neighborhood doesn’t have that concern, but this family faced a lawsuit over a high-ticket birthday gift.
Thomas also tells clients about a woman on the board of a nonprofit that was holding a pumpkin-carving fundraiser. It seemed harmless enough, until two of the teenagers charged with cleaning up after the event started playing a little game in which one was tossing a knife at the other, who was “catching it” with a pumpkin. Had the catcher been injured, the woman could have been held liable as a member of the board, and it’s unlikely the insurance carried by the nonprofit for its officers would have covered a claim. A little-known insurance consequence for those with especially robust portfolios is the possibility of liability arising from participation on boards of nonprofits. Because board membership is usually contingent on the ability to make financial contributions, wealthier individuals are highly sought.
Though an organization can carry insurance to protect its board members, imagine 15 people (or more) being covered by a $1 million total policy. That doesn’t work out to much per person ($66,666.67), so it makes sense to have a supplemental policy that can prevent an incident from having a large financial impact.
“In general terms, we consider the lifestyle,” Thomas says. “We talk to them about what can happen.”
A lot can happen, and people don’t always see the possible problems. Dawson tells about a family whose home was destroyed by fire. The property was insured for a bit less than $2 million, which covered reconstruction of the main house. But the family had an underground sprinkler system and plenty of hardscaping on the grounds. Insured for $40,000, it cost $250,000 to replace. The insurance company covered the cost, but that’s not usually the case. That’s why it’s vital to be covered for everything and to realize that those with more expansive asset pools must spend more time making sure things get covered.
There are other things to consider, such as malpractice insurance for physicians and attorneys. Protection against identity theft—Sicuranza insists that his clients have “strong” computer passwords—is important, as is vigilant credit monitoring.
Kidnapping and blackmail are other issues high-net worth individuals must consider. The average person won’t likely be a victim of either, because it’s unlikely he or she could come up with a fat ransom or payoff. But wealthy folks must be careful.
“You might see someone wearing a very expensive watch where they shouldn’t be wearing it,” Dawson says. “They can get kidnapped.”
It can all be confusing, which is why high-net worth individuals need a team of advisers working together to create a strategy that allows for maximum asset protection (and growth). They also must have people shielding them from other issues that can arise due to wealth. In the end, there are some staples of planning that must prevail, no matter how much money one has.
“You need a budget,” Dawson says. “You have to figure out how much you need in today’s dollars and factor inflation into the equation. A lot of people don’t know how much they spend. You have to put your cash into something more productive than a checking account.”
Dawson recommends his clients have a liquid account capable of handling three- to six-months’ worth of expenses, in event of emergency. He also suggest a more “frugal lifestyle” as people age. The goal is to make it to the finish line without hardship, and those who roar through their 80s spending as if they were still earning a full income might be surprised if their health holds out enough for them to live to 90 and beyond. In today’s economic climate, there are no guarantees that pensions will survive forever or that Social Security will continue as is.
“You have to make sure you have retirement covered,” Orth says. “You have to make sure your lifestyle and essential expenses are covered.”