Understanding Tax Compliance and Risk Management
Ultra-high-net-worth individuals face unique tax challenges, including high rates and ever-changing complex tax codes. If managed improperly or inefficiently, tax issues could significantly erode your family’s wealth and even lead to legal complications.
While most taxpayers don’t need to worry about estate and gift taxes, having significant assets can make them a challenge. Also, like most UHNW individuals, you may have income from several sources like investments, real estate, and business interests that may require special tax planning. And if your assets span multiple countries, you may need to address international tax issues as well.
Navigating these tax issues can be incredibly complex, necessitating a comprehensive compliance and risk management plan.
Common Tax Risks and How to Mitigate Them
As an ultra-high-net-worth individual, you need extra oversight to avoid risks, stay compliant, and manage your tax liability. Understanding the most common tax risks is the first step.
Identifying Potential Tax Risks
While the top tax bracket rate is currently at 37%, it used to be much higher. In fact, in 1963, the top rate was 91%. The future path of rates is difficult to predict, as it’s become a politically charged topic. On one side are the proponents of trickle-down economics, who believe that keeping taxes low enables the affluent to invest more money in ways that create jobs and grow the economy. On the other side are those who believe the wealthy should be paying a larger share, especially on capital gains.
Estate taxes also offer challenges. These taxes only apply to estates over $13.99 million for tax year 2025, but rates for amounts above that threshold range up to 40%. Many states have their own additional estate or inheritance taxes. These taxes can severely reduce the amount you can pass on to your heirs.
Investment income subject to capital gains taxes has its risks. If your investment portfolio is complex, with various asset classes, it can be complicated to determine how to minimize your tax liability without underpaying and incurring penalties.
And, if the U.S. tax code seems overwhelming at 6,871 pages (not including about 70,000 pages of IRS explanations and guidance), if any of your income comes from foreign sources, you could have international tax rules to follow as well. More than 100 U.S. income tax treaties, protocols, notes, and technical explanations govern how U.S. citizens are taxed on foreign income. Under these treaties, residents or citizens of the United States may be taxed at a reduced rate or be exempt from foreign taxes on certain items of income they receive from sources within foreign countries. However, these rules vary among countries and income sources.
Strategies that Could Help Avoid Tax Penalties
You can employ various strategies to help minimize your tax bill legally and avoid tax penalties. While this article can’t cover nearly 7,000 pages of tax code, here are a few approaches that wealthy families may use to handle these challenges:
- Avoid selling stocks or other investment assets unless necessary. You may often borrow against them to achieve your goals without triggering capital gains taxes.
- If you must sell appreciated assets, mitigate the tax burden by selling underperformers for a balancing capital loss.
- Remember that capital gains are generally taxed at a lower rate than income, however, so making money from investments rather than employment can limit your tax bill.
- Put aside assets in a tax-advantaged retirement account like a Roth IRA, if eligible, where they can grow tax-free.
- Consider investing in industries like real estate or oil that offer tax breaks as incentives.
- Donate to qualified charities. You can feel good about giving back and may be able to deduct your donations up to 60% of your adjusted gross income.
- If you own a business, there are special tax considerations. For example, if you’ve experienced losses, consider carrying them over to a future year when they might be more beneficial to offset gains.
- Use annual gifts to lower the value of your estate and the taxes your heirs will have to pay on it. Take advantage of the annual gift tax exemption, currently $18,000 per recipient per year or $36,000 for a married couple.
- Buy whole life insurance as an investment for tax-free growth.
This isn’t an exhaustive list. Your tax or financial advisor can help you determine the best strategies for your situation.
Tax Best Practices for UHNW Individuals
Implementing Proactive Tax Planning
The size of your tax bill depends largely on how effectively you can leverage sophisticated tax strategies. This isn’t a one-time process in April; it requires year-round planning and execution. Every financial move you make during the year should be taken with tax planning in mind because every move can provide either challenges or opportunities. Or both.
Leveraging Professional Guidance for Tax Compliance
Navigating the tax compliance and risk management world isn’t easy. If you’d rather not spend weeks reading the tax code and months or even years trying to understand its ramifications, that doesn’t mean you’ll pay too much or face legal difficulties. This is an area in which professional guidance can be invaluable. In complex situations, your financial advisor may want to combine their knowledge of your overall financial picture with the knowledge of a tax professional who keeps abreast of all the regulations and yearly changes to help you preserve your wealth while staying in compliance.
To be custom-matched with a fiduciary you can trust to support your goals with customized planning and put your interests above theirs, take advantage of our advisor matching program today.
Mike Valenti is a non-registered affiliate of Cetera Advisor Networks, LLC.
