What You Need to Know
Many newly wealthy clients have similar needs that advisors can anticipate when creating a comprehensive financial plan.
Included in that list are the creation of a family office, a plan for charitable giving and the goals and outlining the objectives of the family’s investment portfolio.
Maintaining ongoing, open communication among all family members can help alleviate stress and potential conflicts during the decision-making process.
The number of “overnight millionaires” is on the rise, according to a new report from NEPC Private Wealth. Many newly wealthy families can credit their expanded fortunes to a major liquidity event, most frequently the sale of a business, especially in the technology sector.
In 2020, the wealthiest multimillionaires — those with a net worth of $100 million or more — included 64,000 families around the world holding a total of nearly $24 trillion in wealth, NEPC said, citing the Wealth-X’s “World Ultra Wealth Report 2021.”
For many newly rich families, wealth creates new and sometimes unexpected challenges. These will vary from family to family, requiring their team of financial and legal professionals to come up with creative and personalized solutions.
NEPC’s report looks at the needs that members of this group have in common and how they might be addressed by the family and their advisors when creating a comprehensive financial plan.
According to NEPC, families usually benefit most when they start planning for the liquidity event well before it happens. This helps them make sound decisions during the event itself and also enables them to start thinking about controlling, preserving and passing wealth to future generations.
Through planning, families can address a panoply of considerations and potentially competing interests. They can reduce their tax liability and establish the appropriate structures to steward multigenerational wealth. They can also potentially bolster their level of philanthropic giving, which can further affect taxes and legacy planning.
Setting Up a Family Office
Many families with a net worth of $100 million or more create a family office designed to oversee the tasks and decisions related to investments, insurance, tax, estate, liability and property and staff management.
NEPC notes that each family office’s structure is unique. Some are fully staffed with professionals designated to manage those different functions. Others consist of one person who oversees all aspects of the family’s needs, and still others set up virtually with all tasks outsourced.
Whatever its structure, the family office works with the family’s professional advisors to make financial decisions, including those regarding other family-owned business ventures and philanthropic activities. The office also oversees how the money is distributed within the family to ensure all members receive the amount needed to maintain their desired lifestyles.
Philanthropic Endeavors & Objectives
Most ultra-high-net-worth families want to give back, help those in need and make a positive impact on the world around them, according to NEPC. One strategy is to set up a family foundation, which can serve as the vehicle to make grants and gifts to organizations that align with the family’s mission and philanthropic objectives.
Some families may choose to use a donor-advised fund, which allows them to give to charities in a tax-efficient, streamlined way. A family can also directly support businesses or organizations with positive environmental, social or governance profiles by exploring impact investing options in their portfolio.