Ask the typical financial advisor if he provides advanced-planning services, and you are likely to receive an affirmative reply 99 percent of the time.

This speaks succinctly to the industry's misconceptions about advanced planning. It is not a catchall concept that takes in all manner of forward-looking investment services. Rather it is a specific process that regularly results in the repositioning and restructuring of the assets of the affluent to preserve and magnify their wealth.

Operating from the position that before advisors can provide advanced-planning services they must first understand the process, this article aims to outline the basics.

Cousin of WM

Advanced planning, at its core, is a subset of wealth management. The latter is a comprehensive approach to solving financial problems, incorporating a full array of credit products, discretionary investment management and retirement planning. Advanced planning, by contrast, is composed of a more refined set of expertise:

  • Wealth enhancement
  • Wealth transfer
  • Asset protection planning
  • Charitable giving

Synergies abound among the four services, and the ability to profit from these synergies can meaningfully benefit the wealthy.

Core Elements of Advanced Planning

There are further considerations in advanced planning, however, and those of the utmost importance are the criteria that can predict success for affluent clients — the eight core elements of advanced planning.

Advanced planning must be:

  • Flexible

    Advanced planning must be able to change or adapt in order to meet the exigencies of an evolving situation involving an affluent client's circumstances and/or the financial and legal environments.

  • Discreet

    Discretion relates to the nature and details of the interpersonal relationship that is established between an advanced planner and an affluent client. Furthermore, though an advanced planner's strategies are legitimate and lawful, a low profile helps avoid any questions or retroactive changes in the rules.

  • Transparent

    Although there is no interest or benefit for anyone to advertise the intricacies of an advanced-planning strategy, the plan should nonetheless be made as see-through as possible.

  • Coherent

    While the components of advanced planning can be independent of one another — and, indeed, many strategies can be employed as standalones — a certain degree of integration should permeate all advanced planning.

  • Risk-sensitive

    Advanced planning runs along a scale from plain vanilla strategies at one end to the truly esoteric at the other. While everything is on the proper side of the legal divide, there is clearly a lot of room to be more or less aggressive.

  • Cost-effective

    Advanced planners, in conjunction with their affluent clients, need to balance the benefits of a course of action with its costs, both financial and psychological.

  • Complexity-sensitive

    We advocate that all affluent clients understand the essence, if not the details of the strategies they might choose to implement.

  • Legitimate

    Needless to say, any advanced plan should never incorporate strategies that are — or that might be perceived to be — illegal or unethical. Considering how much can be accomplished by staying well within the law, it is only excessive greed, ego or sheer stupidity that results in otherwise legitimate affluent clients crossing the line.

These eight elements operate in concert with each other and must be considered in any affluent client situation. In fact, the more seasoned and successful advanced planners working with the affluent have developed a high degree of ingrained competency that is a result of continually working with and thinking about these core elements.

Writer's BIO: Russ Alan Prince, president of the market research and consulting firm Prince & Associates, is a leading expert on the private wealth industry and on advisor-based distribution.

Wealth Enhancement

The primary goal of advanced planning for the affluent is to determine the timing, character and amount of taxable income. When it comes to investment income, for example, the ideal transition is from income to short-term capital gains, to long-term capital gains, to tax deferral and, ultimately, to no taxes whatsoever.

This continuum drives the services of advanced planners, with the goal of moving the affluent client situation as far along the continuum as is practicable under the given circumstances. There also are a wide variety of advanced-planning strategies for enhancing wealth, including deferred-compensation programs and contingent swaps designed to offset ordinary income and convert it into capital gains over a specified time.

Wealth Transfer

As long as there are estate and gift taxes, as long as there are intergenerational considerations and as long as there are interconnected business interests, there will be a need for wealth transfer strategies and tactics. When it comes to wealth transfer, advanced planners are called upon to not only facilitate the transfer of wealth in accord with the wishes of the affluent, but to do so in as tax-efficient a manner as possible within prescribed parameters. It is quite possible, for example, to eliminate estate taxes. Achieving that goal could require the use of charitable instruments and the formal abrogation of control over selected assets. Basic estate-planning strategies, like credit-shelter trusts and traditional life insurance, are far from complicated and sufficient for some of the affluent. For those affluent clients with more complicated financial pictures and goals, there are a number of more sophisticated approaches to wealth transfer, including self-canceling installment notes, grantor retained annuity trusts, intentionally defective trusts and remainder purchase marital trusts.

Asset Protection

Asset protection planning is what protects the affluent client's wealth. There are a great many strategies and concepts that the affluent can employ to protect their wealth against potential creditors and litigants, children-in-law and potential ex-spouses. Which ones work best prove to be very situational. Moving beyond the astute use of property and liability insurance, some of the strategies are quite rudimentary and predicated on dissociation, which occurs when the affluent client transfers his or her assets to another person or entity while retaining access. Such strategies include transferring assets to a spouse, offshore trusts and self-settled spendthrift trusts. Getting somewhat more sophisticated, with transformation strategies, the assets of the affluent are converted into different assets that are much harder, if not impossible, for litigants to acquire. Monetization in conjunction with transformation and replication are at the very cutting edge of asset protection strategies. Monetization strategies utilize forward contracts and complex installment sales, whereas replication strategies benefit from derivatives to make assets disappear and subsequently reappear in entities beyond the reach of litigants. As a result, these strategies, if properly executed, will oblige a determined opponent to seek a compromise.

Charitable Giving

Charitable giving is an important component in advanced planning, especially when coordinated with the other three sets of services. Private foundations are a case in point. A family foundation serves a wide variety of functions but the transfer of wealth between family members is tangential, if applicable at all. When an affluent client is strongly philanthropic, that inclination can be coordinated to produce additional wealth enhancement and wealth transfer strategies. Aside from private foundations with their specific limitations, supporting organizations and donor-advised funds allow for the maximum immediate tax benefits timed for the benefit of the client. Charitable remainder trusts and charitable gift annuities provide both tax benefits and income streams. Charitable lead trusts can finesse the estate tax while passing wealth to future generations. Finally, although philanthropy does not coordinate strongly with asset protection, seeing assets go to charities, rather than to litigants and creditors, may produce some satisfaction.