It doesn’t matter how successful you are if your wealth is squandered or placed at unnecessary risk of decay or loss. These top five wealth predators are the most common risks to your wealth. They lurk in the corners of society, pop out unexpectedly and attempt to take a significant bite out of—or even potentially engulf—everything you’ve built for decades. Successful business owners and real estate investors are particularly susceptible. The key is to know and understand these threats, and to develop and implement, a plan to mitigate (or eliminate) the risks wherever possible.
Combined federal and state tax rates for high-income residents in California is now 53 percent. Tax-brackets.org informs us the highest capital gains tax structure in the United States is in California, just behind Denmark in the world rankings.
I find business owners looking to sell their businesses and real estate investors looking to sell their property believe their capital gains tax rate will be 15 to 20 percent. However, when you add the state tax, Affordable Care Act and depreciation recapture, many are shocked to find their rates well above 30 percent. Finally, estate taxes can take another 40 percent of your wealth and planned legacy when you pass on.
Spending significant time and resources in effective legal tax avoidance planning is simply a prudent investment. The return on that investment has the potential to compete with any other investment you make during your lifetime.
According to elocallawyer.com, there are more than 15 million civil lawsuits in the United States every year. Californians win the contest for being the most litigious people in the country. Any successful person or business must simply be aware of their options to protect themselves from lawsuits that may arise from even the most innocent disagreement, incident or injury. Statisticbrain.com states the annual cost to the U.S. economy for civil lawsuits is $239,000,000,000—yes, that’s nine zeros.
The wealthier you are, the higher the probability for litigation to be brought against you. Proper insurance coverage can help, but shouldn’t be the only asset. Depending on your situation, prudent estate planning, business planning, entity structuring and savings plans can go a long way toward helping protect some or all of your assets from this nasty predator.
According to the American Psychological Association, the U.S. divorce rate has reached approximately 50 percent. This reality has impacted the planning of married couples, parents and grandparents. In many cases, the impact and ultimate results have been negative. The thought that a significant part of the family wealth could be lost by the divorce of an heir—or simply squandered by spendthrifts—causes these people to fall into the abyss of the next wealth predator.
Poor decision-making is all too frequently caused by a failure to ask professional advisors for input or neglecting full education of available options. Any decision-making process must include these elements to be sure you’re fully informed and completely understand all of your options to help achieve your goals. Even worse is the person stuck on the procrastination glacier, who has no decision-making process or expert team and, therefore, can’t make decisions. Time passes and the options most likely narrow as time goes by.
This wealth predator expects you to “buy, hold and pray for the best” when placing your hard-earned, hard-saved wealth in the stock markets. This is based on 65-year-old theory that somehow gives itself the moniker “Modern” Portfolio Theory (MPT), which doesn’t come close to reflecting the macroeconomic and information technology reality of the 21st century. For those of means, MPT could be catastrophic to follow. If you’re in the business transition or wealth distribution phase of your financial life, reduced risk and volatility are normally preferred strategies. Buy/hold/pray won’t provide that reduction, as MPT, by definition, expects the investor to remain fully invested, ride the rollercoaster and hold tight through all economic and market conditions.
The overall lesson is to not live in fear of the predators but rather to be aware of them and plan accordingly. These predators may be an opportunity for effective planning and elimination of the threat. Contact your expert team of professionals to learn your options along with the advantages, disadvantages and cost of each, so you’re empowered to make informed decisions for you, your business and your family.
Bruce Frankel, MBA, CFP, AIF, CEPA, is managing partner of Yerba Buena Financial Partners (YBFP) and a principal with 1031 Investment Property Solutions and specializes in working with successful real estate investors and mid-size business owners. He has deep knowledge and experience in business planning, entity structuring, tax issues, employee and executive benefits. He is a frequent speaker on these subjects to business groups and writes the blog, Frankely Speaking. Bruce is the author of the upcoming book The 7 Biggest Mistakes Made By Successful Entrepreneurs. To get more in-depth information on How to Avoid the Top Five Wealth Predators of the Affluent, visit ybfp.com/resources/frankely-speaking/.
Investment advice offered through Yerba Buena Advisory Group, LLC, a registered investment advisor. Yerba Buena Financial Partners and Yerba Buena Advisory Group, LLC are separate entities.
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