What tax challenges are there at the top?
Taxes have become increasingly difficult to navigate, even more so for high-net-worth individuals (HNWIs). Regulations such as the Foreign Account Tax Compliance Act and the Common Reporting Standard have brought new challenges. The pandemic brought economic stimuli, tax code changes, and shifts in global trade dynamics.
"The direction of travel is one that isn't likely to change any time soon," said Michael Parets, a partner specializing in private tax at Ernst and Young. "It's becoming increasingly critical for individuals to have a totally transparent view of their tax liabilities and obligations, and that of their families, across all the jurisdictions where tax is payable, as well as having systems in place to monitor any tax changes and their implications."
There are a number of strategies that can help HNWIs navigate this tax landscape.
Diversifying investments
Diversification is a key strategy in tax allocation. Investments are spread across a range of asset classes, such as stocks, bonds, real estate, and cash. By diversifying, investors can reduce the overall risk of their portfolio while potentially maximizing returns. From a tax perspective, diversification can also offer advantages, as different types of investments may be subject to different tax treatments. For example, long-term capital gains on stocks may be taxed at a lower rate than ordinary income, while certain types of bonds may offer tax-exempt interest income.
Optimizing available allowances
Taking advantage of available tax allowances and incentives can be an effective way to minimize tax liabilities. This includes contributions to retirement accounts such as pensions or individual retirement accounts (IRAs), which may offer tax-deferred growth or tax-free withdrawals in the future. Investing in tax-advantaged accounts such as 401(k)s or ISAs (Individual Savings Accounts) can help reduce current tax burdens while building wealth for the future. Also, strategic use of tax-efficient investment vehicles such as stocks and shares ISAs or municipal bonds can further optimize tax efficiency within a portfolio.
Estate planning
Estate planning involves structuring assets and wealth transfer strategies to minimize estate taxes and ensure the efficient distribution of assets to heirs. Techniques such as setting up trusts, gifting assets during one's lifetime, and utilizing estate tax exemptions can help reduce estate tax liabilities and preserve wealth for future generations. By carefully planning and structuring their estates, HNWIs can minimize the impact of estate taxes and ensure their wealth is passed on according to their wishes.
International investments
Investing in international markets can offer opportunities for diversification and potentially higher returns, but it also introduces additional tax considerations. HNWIs with international investments must navigate complex tax laws and regulations in multiple jurisdictions, including rules governing foreign income, capital gains, and estate taxes. Proper tax planning and structuring of international investments are essential to ensure compliance with tax laws and optimize tax efficiency.
Business structure
For HNWIs who own or operate businesses, choosing the right business structure can have significant tax implications. Different business structures, such as sole proprietorships, partnerships, corporations, or limited liability companies (LLCs), offer varying levels of liability protection, tax treatment, and flexibility. Through careful planning, HNWIs can optimize tax efficiency and minimize tax liabilities associated with their business activities.
Tax planning is an important part of a comprehensive wealth protection strategy. An experienced international tax attorney can look at your financial goals and create a plan that minimizes liability and maximizes financial flexibility.
Attorney Suzanne DeWitt of Dewitt PLLC has years of experience working with high-net-worth, very-high-net-worth, and ultra-high-net-worth individuals. Contact us today to learn more about how we can help.