Managing Millions: Trusted Advisors Help Preserve Wealth

High net-worth individuals and business owners face a unique host of estate-planning challenges, along with wealth preservation issues. For families and business owners of means, concerns do not generally revolve around whether they will retire comfortably, educate their children or live the lifestyle they want. Instead, the wealthy fret about incurring tax liabilities, protecting wealth from lawsuits and securing their assets for future generations.

Andy Ferguson, a wealth management advisor for the ABD&F Group at Merrill Lynch in Nevada, said his approach for “super-affluent” households is tied to first understanding what they are trying to achieve with their money. “In our experience, wealthy people have plenty of money, but not enough time,” he explained. “Our job is not to role the dice and quadruple their money, but rather to help them preserve what they have and simplify their lives.”

Ferguson also underlined the importance of educating younger adults within families of means, who will become stewards of great wealth and the potential philanthropists of the future. “Money can destroy or enhance,” he pointed out. “Our ambition is educating these young adults on basic financial matters, such as the difference between a stock and a bond and when to borrow versus paying something off. These pointers are often more powerful coming from a third party rather than Mom, Dad or Grandfather.”

NUANCES IN NEVADA

Those doing business in Nevada have unique tax advantages and wealth preservation opportunities, said Michael Potter, vice president, Nevada Corporate Headquarters. Nevada has a new limited partnership law that came into effect January 1, 2004 that provides greater control and protection for the managing partner, who can protect and funnel profits into trusts, insurance plans, mutual funds or other areas. This is known as a limited liability limited partnership.

The triple LP is an enhancement of existing limited partnership law. It gives the managing general partner the same degree of liability protection that the limited partners enjoy and allows the partnership to have more flexibility with respect to how it allocates partnership shares. “A family going into a limited partnership (in Nevada) can hold as much as half and allocate the other half to children, no longer having to minimize ownership out of concern about personal liability exposures,” Potter said, adding that Nevada has a protection that is only available in four other states that limits the creditors’ remedies.

Potter also points out the benefits of the charitable remainder trust, often used by wealthy individuals who wish to minimize their degree of exposure to capital gains taxes and increase their charitable deductions, while minimizing the size of the taxable estate. This IRS-formed trust allows people to move portions of capital gains to a trust that may also accrue interest and is relatively safe from creditors.

Attorney Michael Kling is a proponent of Nevadans forming a Family Limited Partnership or Limited Liability Company in conjunction with an asset protection trust, such as a self-settled spendthrift trust. “In Nevada, if you transfer assets into a trust that is irrevocable and you are a beneficiary, it can protect you against former creditors.”

DIVERSIFIED STRATEGIES

Fair, Anderson & Langerman CPAs recently formed an alliance with Vince Eckelkamp of Eckelkamp Retirement Planning. President Jill Langerman said many high-net-worth individuals tend to plow everything they own back into their main asset – their business. “They need to plan for other investments beside their business,” urged Langerman, who also pointed to the importance of succession planning and a good exit plan. “Having a very diversified portfolio also helps a lot,” Langerman said.

The notion of wealth management is not limited to financial planning or estate planning; it also involves preparing the heirs for the wealth, said Bob Kasner and Ted Schlazer, formerly of Paragon Asset Management. They are now first vice presidents of Mellon Financial’s Private Wealth Management Group in Henderson. “Wealthy individuals need to consider who will be around after they are gone to handle their large estates,” said Kasner.

“Whatever your heart tells you to do you, do the opposite,” Kasner said of decisions regarding investing. “Information is so readily available, but the way many investors react to it is a terrible thing. Managing money is very emotional. That’s why there is value in getting an outside party involved. We don’t fall in love with a stock.”

Kasner tells of a client who had $500,000 invested all in stocks. He was producing a reasonable rate of return and taking out about $50,000 for living expenses each year. He assumed – wrongly – that his returns were guaranteed. His plan was based upon a flawed theory – he lost big and could never make that money back. “There is great power in diversified accounts,” Kasner said.

Randy Campanale, senior vice president and state executive, Western National Trust, an affiliate of Nevada State Bank with offices in both Las Vegas and Reno, works with clients to do financial stress tests and modeling exercises to test their portfolios against various outcomes and changes the client wants to make.

“With the bear market from 2000 and 2003 and the scandals on Wall Street, our high-net-worth clients are looking for advice,” Campanale said. “The stock market declined precipitously in the early 2000s, and the answer for many people was to look long-term. However, most people bail out before the turn-around, which guarantees they will lose money. We are looking at alternative investments for our clients with a long-short strategy to increase return on an absolute basis and reduce risk.”

Campanale, who is also president of the Southern Nevada Society of Financial Analysts, added there is obvious concern about the war on terrorism and what changes it will hold for the financial market. “It is a difficult environment right now because of the returns of various asset classes. Because of this difficult environment, it’s even more important to have a trusted advisor.”

EXPECTING THE UNEXPECTED

Many individuals of means are setting up wills and trusts at an earlier age. Sept. 11, 2001 opened many eyes to the importance of proactive estate planning. “I’ve had many clients say to me, ‘I’ve been wanting to do this for years,’” said Michael Kling, a Nevada estate planning attorney who is also a CPA. “Most high-net-worth individuals implement a plan and then rest. They, as well as their attorneys, need to be proactive in the management of their plan to assure it has been properly implemented and stays current with ever-changing tax and estate laws.”

The wealthy also face complicated issues in the event of marriage or remarriage. The awkward, yet practical issue of pre-marital agreements may clarify the nature of employment benefits, retirement benefits and deferred compensation plans. Stock options can also be a very contentious issue, especially in family-owned firms.

Tom Standish, a partner at the law firm of Jolley, Urga, Wirth, Woodbury and Standish, has worked with many high-net-worth individuals and business owners. “The details of the pre-marital agreement should be worked out and all of the terms set before you send out the wedding invitations,” he said. “Because if something happens and there is a breakdown in negotiations, you have a horrible, humiliating and uncomfortable situation.” With respect to marriage, the value of the family limited partnership or limited liability company is segregating the assets into a totally separate entity so they are not in an individual’s name. This helps prevent mistakes in transfers where a spouse’s name could appear and brings a lot of clarity to the situation, Standish added. “Try to clarify co-mingling issues,” Standish said. “Limiting litigation in a divorce benefits both parties.”

ACCOUNTING FOR ESTATE TAXES

One of the biggest failures in the area of investments and business ownership is neglecting to have a sensible plan in place to minimize estate taxes. Michael Potter, vice president, Nevada Corporate Headquarters, pointed out that the family of Joe Robbie, who owned Joe Robbie Stadium and the Miami Dolphins, had done no planning to reduce their taxable estate. The family was forced to sell both the football stadium and the team to pay estate taxes.

Failure to plan ahead can result in many lost assets. Todd Hauge, investment representative with Edward Jones, stresses the importance of properly allocating portfolios to avoid undue risk or loss of assets upon death. Hauge urges high-net-worth clients to consider the use of life insurance or irrevocable life insurance purchased within a trust as a tool to pay estate taxes upon death.

“We have used premium dollars to buy a much greater payout upon death to take care of taxes and preserve assets for the heirs,” Hauge said. He pointed to the added benefits of trusts that come in the form of tax advantages, including tax-free and tax-deferred avenues, reducing the taxable income of the high-earner.

“Having more money doesn’t solve problems; it creates more complexity,” said Brian Loy, president of Reno-based Sage Financial Advisors. “People are living longer and want to increase their quality of life and reduce risks. The real risk isn’t losing your money – it’s outliving it.”