It may not seem like ultra-high-net-worth individuals (UHNWIs) have much to worry about in an environment of expanding income disparity, where the wealthy are accumulating money at new levels while a record number of average citizens live paycheck to paycheck.
A individual with a net worth of $30 million or more is referred to as a UHNWI. The ultra-wealthy deal with their own distinct brand of financial issues, even though it takes a special kind of financial irresponsibility for someone with that kind of wealth to develop the kinds of money problems that afflict the rest of society, such as bankruptcy, foreclosure, or wage garnishment.
Many contend that UHNWIs’ financial issues are ones that the majority of people in the world would adore having—similar to being excessively attractive, intelligent, or having an excessive number of Saturday night invitations to chose from.
These difficulties include inheritance planning, the constantly changing tax laws, maintaining their standard of living in retirement, and safeguarding the principal in their bank accounts. A UHNWI worth $50 million is frequently petrified to death of falling below the level of a basic millionaire, despite the fact that this may seem absurd to someone earning the average salary for an average job.
Those with a net worth of $30 million or more are considered ultra-high net worth individuals (UNHWIs).
The majority of UHNWIs’ issues relate to controlling their financial resources and protecting their fortune.
UNHWIs may be burdened by politically charged attitudes toward the wealthy that lead to adjustments in income, inheritance, and estate taxes.
For UHNWIs, illiquidity—money locked up in difficult-to-access assets—is another issue.
The high-growth assets that made UHNWIs wealthy are usually the first to experience a sharp decline when a bear market or recession strikes.
Who Are People With Ultra-High Net Worth?
An ultra-high-net-worth person (UHNWI), as stated above, is somebody with a net worth of over $30 million, including their primary property. People who fit into this group typically hold a sizable amount of the world’s wealth, making them the richest people in the world.
Around 513,244 UHNWIs lived in the world in 2019, with 240,575 of them residing in the US alone. Among the wealthiest individuals in the world who fit this description include Jeff Bezos, the creator of Amazon, Mark Zuckerberg of Meta (previously Facebook), Warren Buffett, Bill Gates, and the Walton family, who are the Walmart fortune’s heirs.
Revisions to Tax Codes
The way in which the extremely rich get taxed has been a political hot potato for the entirety of the twenty-first century. Few subjects in recent memory have so clearly and ideologically split lawmakers and the general public. On the one hand, proponents of the supply-side approach channel Ronald Reagan, arguing that keeping taxes low for the wealthy allows them to invest in ways that boost the economy and create jobs for everyone else.
The trickle-down economics school of thought encourages tax cuts for the wealthy not only for their own gain but also because their success trickles down to the rest of society.
Then there is the opposing viewpoint, which contends that the middle class and the working poor bear an unfair portion of the tax burden and that UHNWIs take advantage of tax breaks and ingenious accounting techniques to pay far less than their fair amount. Long-term capital gains, which are a common way for wealthy people to accumulate their money, are explicitly mentioned by proponents of greater taxes on the wealthy. Long-term capital gains are subject to income-related taxes, with the top earners paying 20%.
The largest revision to the tax code in roughly 30 years was made by the Tax Cuts and Jobs Act, which the Trump administration signed into law on December 22, 2017. Seven tax brackets were maintained, with two remaining at the same rate and five being altered, including the top bracket. That rate was reduced by the new code from 39.6% to 37%. These modifications are only temporary and are anticipated to end around 2025.
Historically, the tax rate for people with extremely high net worth was substantially higher. It was 70% as recently as 1980. The highest tax rate in 1963 was a startling 91%. There are many politicians who would support a return to these high rates on the very rich. UHNWIs live in continual fear of having power shifted away from them because of the extreme divisiveness in politics at the moment.
A new tax plan put forth by President Biden would tax the affluent more heavily than they now are. A new top income tax rate of 39.6% would be implemented, which would apply to individuals earning more than $452,700 annually and married couples filing jointly who earn more than $509,300 annually. The intention is to do this in 2022. Additionally, Biden wants to raise the capital gains tax on people who make $1,000,000 or more to 39.6%.
When the provisions of the Tax Cuts and Jobs Act expire in 2025, the 39.6% rate will be reinstated if Biden’s tax proposal is rejected.
Ultra-high-net-worth People are concerned about keeping their wealth so they can maintain their current standard of living. However, the majority of them also desire to leave their wealth to their heirs after their passing. They desire that as little of this money as possible be taken by the government before it is passed on to future generations.
Only the very rich are subject to the estate tax, and the top 10% of earners are responsible for paying more than 90% of the tax. The 0.1% of Americans with the highest incomes pay almost 40% of the nation’s estate taxes. For the 2019 tax year, the estate tax exemption has been increased by $11.4 million as a result of the Tax Cuts and Jobs Act. In 2020, this amount was $11.58 million, and in 2021, it will be $11.7 million. Anything more and above that is subject to a 40% tax rate.
Although the exemption has grown over time, the top estate tax rate has actually decreased. Anything beyond the $600,000 exemption in 1997 was subject to taxes of up to 55%. This indicates that the more a UHNWI stands to lose upon leaving of their estate, the more the estate is worth—at least it’s above the exemption. In addition, a lot of states apply their own estate taxes on top of the federal estate tax. Some also charge beneficiaries inheritance taxes.
UHNWIs employ a variety of strategies to lessen the impact of the estate tax. In order to avoid the estate tax, these strategies include leaving their estates to surviving spouses, who are then free from paying taxes on them, giving to charities, and creating a variety of trust accounts.
Keeping Up a Lifestyle in Retirement
Investing made UHNWIs wealthy, therefore there isn’t really a difference between working and retirement years for them. Age is not an issue for these people; they are inclined to keep doing what has worked for them.
However, those who acquired UHNWIs through employment, such as CEOs and other well-paid professionals, can experience an income loss when they opt to retire. While having $30 million or more should be sufficient to support any type of retirement lifestyle, some UHNWIs manage their money poorly and may eventually need to pull back.
Illiquidity is a problem that occasionally affects UHNWIs; despite having millions of dollars, much or all of it is invested in real estate, land, and other assets that are difficult to convert to cash. When they still have a steady stream of income, other UHNWIs do not experience the repercussions of their excessive risk-taking as much. However, when they retire, a significant loss is harder to recover from.
Keeping Their Money Safe
Numerous UHNWIs were reduced to the status of high-net-worth persons (HNWIs), or those with a net worth of at least $1 million but less than $30 million, during the Great Recession of 2007 to 2009. A very unfortunate few lost everything since the hemorrhage of their riches extended beyond losing the hyper label.
The majority of UHNWIs do not keep their money in certificates of deposit (CDs), money market accounts, cash value life insurance, or other ostensibly safe investments that at best offer meager returns. The fact that they use aggressive investment vehicles that constantly outperform the market is one of the reasons they are so affluent.
However, in concerns of the market, reward and risk frequently go hand in hand. The high-growth assets that made UHNWIs wealthy are usually the first to experience a sharp decline when a bear market or recession strikes. Due to this, UHNWIs who depend on the markets for their income frequently experience ongoing stress due to the threat of an impending crisis.
A minor portion of the world’s population is made up of UHNWIs. Their lifestyle appears to be opulent because it differs greatly from that of the majority of people. And their issues reflect that as well, with the majority of them centered on controlling their financial resources and maintaining their riches.