High net worth individuals are generally considered to have at least $1 million in liquid assets. Liquid assets are assets that can be easily converted into cash, such as stocks or shares. bank accountsRather than illiquid assets such as vehicles or real estate.

Those lucky enough to have high net worth may need specialized wealth management to address many issues, from estate planning and charitable giving to business succession planning, risk management and more.

Read Next: 7 Reasons You Should Consider a Financial Advisor Even If You’re Not Rich

What is High Net Worth Asset Management?

High net worth wealth management involves many different elements. Here are the most common:

• Investments: Investments are the engine of any financial plan as they create the wealth that defines what a high net worth individual is.

• Tax planning: Tax planning is the art of keeping what you earn rather than leaving it to the government.

• Estate planning: Estate planning refers to what happens to your assets after your death or incapacity. It aims to minimize taxation and ensure that your money goes to the people or institutions you choose.

• Risk management: Risk management means protecting the wealth you have and growing it in a way that doesn’t require taking worthless risks.

Investment Strategies

All investors benefit from diversification, but high net worth individuals It has the advantage of accessing more complex investment strategies.

In addition to traditional investments such as stocks and bonds, high-net-worth individuals often diversify their portfolios with, for example, real estate, private equity or hedge funds. They can also turn to alternative investments such as fine arts and collectibles. precious metalsfor example.

Private investments not only help diversify investment portfolios, but can also help manage risk and increase returns. Most high net worth individuals prefer to work with experts due to their complexity.

Tax Planning

Taxes aren’t always the easiest topics to understand; Therefore, it is often more profitable for HNWIs to work with experts in this field. The complex set of tax rules actually offers many ways to reduce or avoid taxes, especially for those with high incomes or high net worth. Here are some common strategies.

Choose Tax Advantageous Investments

One of the best ways to avoid taxes buy tax-free investments. Municipal bonds, for example, are federally tax-exempt and are also exempt from state taxes where issued. Treasury securities are federally taxable but always exempt from state tax.

Contribute to Tax Advantaged Accounts

Although they work slightly differently, both IRAs and 401(k) plans (in addition to 403(b) plans, 457 plans, and some other plans) allow tax-deductible contributions. Meanwhile, the money in the account grows tax deferred until it is withdrawn. With Roth IRAs, savings are even more impressive because qualified distributions are also tax-free.

Contribute to Charity

Making charitable contributions is not only good for the greater good, but there are some great benefits for high net worth individuals as well. Contributions are generally tax deductible, and donating appreciated securities can also help you avoid paying. capital gains tax.

Harvest Tax Losses

One of the most generous tax breaks, especially for wealthy investors, is the ability to offset capital gains against capital losses. For example, if you had a big year in the stock market and made big profits, you could sell your losing positions and offset those gains with your losses, thus avoiding paying taxes.

Estate Planning

Estate planning is especially important for HNWIs. As your net worth increases, your tax bracket and the amount you have to pay also increases. Correct use trusts, wills, and other estate planning tools can help HNWIs transfer their wealth efficiently. Here’s how:

Trusts

A trust is a legal document you can use to hold and manage assets, set rules for how money is used and which beneficiaries will receive that money after you pass, all while avoiding probate.

wills

A will is very similar to a trust, but it still must go through the probate process, which is a public process. Wills take effect after you die, although a trust may exist while you are still alive. Even if you have a trust, you still need to have a will to cover any gaps in your trust and a working estate planning document in case your trust is not yet funded.

Other Estate Planning Forms

In addition to trusts and wills, HNWIs often have other estate planning tools in place. For example, a power of attorney instructs someone to manage your financial affairs in the event you become incapacitated. An advance health care directive allows someone you choose to make medical decisions on your behalf if you are unable to do so.

Preservation of Wealth

Asset protection and risk management go hand in hand. While HNWIs often take some risk to acquire significant wealth, they are also generally risk averse. After all, no one with a large amount of money wants to see it disappear, especially if they worked hard to get it. This is where wealth preservation and risk management come into play. Here are some ways wealthy people protect their wealth:

Insurance

Insurance is one of the best ways to protect assets from loss. fire, house and car insuranceFor example, while protecting personal property, life insurance protects a family from the loss of the primary breadwinner.

HNWIs also often have umbrella policies to provide additional coverage against personal lawsuits or to cover gaps in other insurance. They may also use insurance as an investment, to build cash value or to transfer wealth through an irrevocable life insurance trust and reduce estate taxes. Because these strategies are complex, they should be used with a licensed financial professional for life.

Smart Asset Allocation

HNWIs often use smart asset allocation to diversify their portfolios across unrelated assets. In addition to standard investment options such as stocksHNWIs often include precious metals, hedging strategies, alternative investments, real estate, and commodities in their portfolios.

Working with a Wealth Manager

High net worth individuals almost by definition have more complex financial lives. Since many high-net-worth individuals also run their own businesses, manage charities, own extensive investment portfolios, or all of the above, it makes sense that they often choose to work with a wealth manager to coordinate all of their financial planning.

Not only do many of these HNWIs have little time to manage their complex financial lives, they often lack the specialized expertise that professional asset managers have.

While HNWIs are often knowledgeable and even experts in estate management, few are also experts in tax and estate planning. It is almost necessary to find a way to overcome any financial pitfall with a proper risk management strategy and that is why most people choose to hire financial planners.

Last Shot

In theory, all Americans have the same access to wealth planning strategies. But the reality is that high net worth individuals not only need more advanced solutions but also have more options available to them than the average American.

For example, wealthy investors need more help with tax and estate planning than the average American, and their wealth often creates financial situations that do not apply to the vast majority of investors. Being rich often means your financial situation is more complicated. It is often best for such investors to consult financial professionals.

This article was first published on: GOBankingRates.com: Expert Wealth Management Solutions for High Net Worth Individuals