The rapper Notorious B.I.G. had it right: “The more money we come across, the more problems we see.” If planning for wealthy people is daunting, planning for the ultra-rich — those with net worth in excess of $50 million — is exponentially more involved.

Indeed, when it comes to dealing with the truly wealthy, the very fabric of advanced planning often changes, expanding in unexpected ways that require advisors to employ innovative and exclusive strategies. These do not obviate the need for more basic strategies, such as defective trusts, partnership arrangements and private placement variable life insurance. But in today's hyper-competitive environment such vehicles are mere starting points for dealing with the ultra-wealthy.

The common thread trait of advanced “ultra” services is that they were initially created for businesses. Just as multinational corporations create their own de facto offshore economies, so can advisors create a customized financial state for their ultra clients. Sure, treating the client as his own corporation is an involved process, but such an effort is necessary for those who wish to play in this rarified space.

Big Estate Planning

One area of advanced planning for ultras that has undergone a huge transformation in this regard is estate planning. Estate-planning services in general have become highly commoditized, but those who are specializing in the needs of the ultra-wealthy have been able to differentiate themselves nicely. While the more basic strategies have a place and will continue to be essential to many of the ultra-affluent, we now are seeing the adoption of more sophisticated advanced-planning strategies for the ultra-affluent. Many of these significantly mitigate the tax burden of ultras by leveraging the tax code (though tax benefits are often a mere byproduct of a desired business objective). Because there is definable and significant economic benefit divorced from the tax benefits, these strategies result in bright line transactions.

Let's take a look at a few of these strategies. (We are not, by the way, flirting with anything that could be viewed as a listed transaction — that is, no “BOSS” or “Son of BOSS,” aggressive tax-avoidance schemes for corporations and wealthy individuals that have been outlawed).

In a family way.

A family office “locks in” its executive director as an employee for a set number of years and ensures monies would be available to hire a replacement if that person dies or becomes disabled. What makes this strategy so attractive is that the family office is managing the monies that will be used to pay out in case of disaster or will be used as a form of deferred compensation. Moreover, the monies set aside for this purpose grows in a tax-free environment.

Taking care of business.

An ultra-affluent family uses special purpose entities to provide asset protection for a number of family businesses as well as a way to obtain credit at exceptionally low interest rates. The loans are then used to fund a series of entities used for estate planning, enabling selected family members to get a tax-advantaged revenue stream potentially in perpetuity. Meanwhile, nearly all the income taxes owed by the family are offset by the interest payments on the loans.

Income conversion machine.

The wealthy family converts taxable income, such as the funds generated by investing in hedge funds, into monies that are taxed as either dividends or capital gains or, in some cases, not at all, as opposed to being taxed as ordinary income. This can result in a meaningful increase in return on a hedge fund investment. As noted, these tax benefits are the byproduct of providing the ultra-affluent a way to better manage certain personal and/or business risks.

Offshore willing.

An ultra-affluent family transfers a majority of its operating business assets as well as its commercial and personal real estate into an offshore structure. This places all the assets outside the reach of creditors, yet still leaves them available for use by the family. Moreover, the strategy enables the near tax-free interfamily transfer of assets at a discounted rate of 68 percent.

Global thinking.

Using the differences between various countries' tax codes to its advantage, an ultra-wealthy family engages in tax-arbitrage between jurisdictions. A variety of strategies permit those with multiple business interests to leverage those interests in their use of capital and to offset currency risks. This is akin to corporate transfer pricing. One byproduct: the reduction or elimination of personal income taxes.

The art of tax avoidance.

The ultra-affluent family discounts the value of their fine art and rare coin collection using a leveraged derivative transaction. These collectibles will eventually be transferred to the next generation at a projected one-fifteenth their current market value, because of the tax savings due to the accumulated interest on the loans, as well as from the discounting process.

Celebrity privilege.

An ultra-affluent celebrity creates a deferred-compensation plan using an offshore structure. The entity is paid all monies earned by the celebrity outside the U.S. All the monies in the offshore structure are disclosed to the IRS. Still, all estate and gift taxes on these funds have been negated. Monies that will eventually come out of the entity are taxed at 15 percent or less. Also, in the event that the celebrity's investments in artistic projects lose money, he can be reimbursed those funds from the entity on a tax-free basis. Finally, the funds in the offshore structure grow tax-deferred.

The Source.

By and large, corporate tax attorneys design these strategies for their large national and multinational clients. As you can see, though, with a little tweaking and some minor re-engineering these strategies are ideal for specific ultra-affluent clients. The strategies have been held up in courts of law.

Employing these strategies is a business, personal and financial boon for the very wealthy. The ultra-affluent are increasingly enjoying select economic benefits and achieving their goals while mitigating their tax burden by employing strategies that were once used exclusively by the largest firms.

There is, however, a catch: For any particular strategy to work, the prospective ultra-affluent client must fit a very precise profile. Put another way, these strategies are not appropriate for many of the ultra-affluent.

It is a mistake of gargantuan proportions to look at these strategies for any but the most affluent clients to consider these exotic instruments and tactics. Selling them to the wrong clients is likely to result in an inappropriate transaction — and an eventual lawsuit.

The success of the strategies requires a highly skilled and talented advanced planner, but more importantly, the ultra-affluent client with just the right needs and wants, and with the requisite resources.


Some institutional approaches that can be applied to high-net-worth clients.

Leveraged derivatives can be used to discount the value of fine art collections.

Deferred compensation with an offshore structure let ultra-affluent clients shelter money they make outside the country from U.S. taxes.

Inter-country tax arbitrage lets clients benefit from the differences in various countries' tax codes.

Offshore relocation of a client's operating business assets shelters these assets from creditors.

Tax conversion strategies let clients turn ordinary taxable income into monies that are taxed as either dividends or capital gains or, in some cases, not at all.

Special purpose entities provide asset protection for a client's family business while giving it a way to obtain credit at exceptionally low interest rates.