In a climate of growing income inequality, where the rich are amassing wealth at unprecedented levels while record numbers of everyday citizens live paycheck to paycheck, it may not seem like ultra-high-net-worth individuals (UHNWIs) have much to worry about.
A UHNWI is defined as a person with a net worth of $30 million or more. While it takes a special kind of financial irresponsibility for a person with that kind of wealth to develop the kinds of money troubles that plague the rest of society—think bankruptcy, foreclosure, or garnishment of wages—the ultra-wealthy deal with their own unique brand of financial problems.
Many argue the financial problems that plague UHNWIs are ones most of the world would love to have, kind of like being too good-looking, too smart, or having too many invitations to choose from on a Saturday night.
These challenges include ever-evolving tax codes, estate planning, sustaining their lifestyles during retirement, and protecting the principal in their financial accounts. While it may sound crazy to someone working an average job for average pay, a UHNWI worth $50 million is often scared to death of descending to simple millionaire status.
- Ultra-high-net-worth individuals (UNHWIs) have a net worth of $30 million or more.
- The bulk of UHNWIs' problems revolve around managing their financial assets and preserving their wealth.
- Politically charged feelings about the wealthy that spark changes in income, inheritance, and estate taxes can burden UNHWIs.
- Illiquidity—money tied up in hard-to-get-at assets—is another problem for UHNWIs.
- When a bear market or recession hits, the high-growth investments that helped UHNWIs get rich are frequently the first to take a precipitous dive.
Who Are Ultra-High-Net-Worth Individuals?
As mentioned above, an ultra-high-net-worth individual (UHNWI) is anyone who has a net worth of over $30 million, including their primary residence. People who fall into this category tend to be the most wealthy people in the world, holding a good portion of global wealth.
In 2019, there were approximately 513,244 UHNWIs around the globe—240,575 of them in the United States alone. Some of the wealthiest people in the world who fall into this category include Amazon founder Jeff Bezos, Meta's (formerly Facebook's) Mark Zuckerberg, Warren Buffett, Bill Gates, and members of the Walton family; heirs to the Walmart fortune.
Changing Tax Codes
Throughout the 21st century, the tax treatment of the super-wealthy has served as a political football. Few issues in recent memory have more starkly divided politicians and the general public along ideological lines. On one side, supply-side adherents channel Ronald Reagan, proclaiming that keeping taxes low for the affluent frees up money for them to invest in ways that create jobs and grow the economy for everyone else.
This line of thinking, known as trickle-down economics, advocates cutting taxes for the rich not just for the benefit of the rich, but also because their prosperity then cascades down to the rest of society.
Then there is the other side, which feels the middle class and working poor shoulder too much of the tax burden, and that UHNWIs exploit loopholes and creative accounting practices to pay far less than their fair share. Proponents of higher taxes on the wealthy point specifically to long-term capital gains, the method by which many wealthy people amass their fortunes. Taxes on long-term capital gains depend on an individual's income level, with the highest earners paying 20%.
The Trump administration's Tax Cuts and Jobs Act—signed into law on Dec. 22, 2017—made the largest overhaul to the tax code in about 30 years. It retained the structure of seven tax brackets, keeping two at the same rate and changing five, including the top bracket. The new code dropped that rate from 39.6% to 37%. These changes are temporary and are expected to expire in 2025.
The tax rate for ultra-high-net-worth individuals used to be much higher. As recently as 1980, it was 70%. In 1963, the top tax bracket was a staggering 91%. Politicians abound who would love to see a return to these high rates on the extremely wealthy. With polarization in politics at an all-time high, UHNWIs live with the constant anxiety of a power shift toward those less friendly to their interests.
President Biden has proposed a new tax policy aimed at taxing the wealthy more than they are being taxed right now. There would be a new top income tax rate of 39.6%, which is targeted at those making more than $452,700 a year and married couples filing jointly making more than $509,300. The goal is for this to start in 2022. Biden intends to also increase the capital gains tax to 39.6% for those earning $1,000,000 or more.
If Biden's tax proposal is not approved, the 39.6% rate will be re-imposed in 2025, when the provisions in the Tax Cuts and Jobs Act expire.
Ultra-high-net-worth individuals worry about retaining their riches so they can continue to fund their own lifestyles. But most of them also want to bequeath their fortunes to their heirs when they are no longer around. Ideally, they want the government to appropriate as little of this money as possible before it passes to the next generation.
The estate tax only applies to the extremely wealthy, with more than 90% of the tax being paid by the top 10% of earners. Roughly 40% of estate taxes are paid by 0.1% of the richest people in the country. The Tax Cuts and Jobs Act increased the estate tax exemption for the 2019 tax year, so $11.4 million of an estate is exempt from taxes. This number was $11.58 million in 2020 and is $11.7 million for 2021. Anything above and beyond that amount is taxed at a rate of 40%.
Although the exemption has been increased over the years, the maximum estate tax rate has effectively dropped. In 1997, anything above the $600,000 exemption was taxed as much as 55%. This means that the more the estate is worth—at least it's above the exemption—the more a UHNWI stands to lose in the passing of their estate. Moreover, many states have their own estate taxes, which are imposed on top of the federal estate tax. Some also impose inheritance taxes on beneficiaries.
UHNWIs use many schemes to mitigate the effects of the estate tax. These tactics include leaving their estates to surviving spouses, in which case they are exempt from taxation, making use of charitable contributions, and setting up a variety of trust accounts—all of which can be used to get around the estate tax.
Sustaining Lifestyle During Retirement
For UHNWIs who became rich from investing, basically, there's no distinction between working years and retirement years. These individuals are likely to continue doing what has worked for them, with age being an irrelevant factor.
However, those who became UHNWIs by working, including CEOs and other highly paid professionals, sometimes face a loss of income when they decide to call it quits. While having $30 million or more should be enough to live any kind of retirement lifestyle you want, some UHNWIs do a poor job of managing their money and may have to scale back at some point.
One problem that comes up at times with UHNWIs is illiquidity; they have millions of dollars, but most or all of it is tied up in land, real estate, and other assets they can't easily convert to cash. Other UHNWIs take too many risks with their money, and while they do not feel the effects so much when they still have piles of money coming in, they feel it when they retire, and a big loss is not so easily replenished.
Protecting Their Wealth
During the Great Recession of 2007 to 2009, many UHNWIs became merely high-net-worth individuals (HNWIs), meaning individuals with more than $1 million in net worth but less than $30 million. For a truly unlucky few, their wealth hemorrhaging went beyond losing the ultra label—meaning they lost everything.
Most UHNWIs do not have their money sitting around in certificates of deposit (CDs), money market accounts, cash value life insurance, and other so-called safe investments that provide tepid returns at best. One of the reasons they are so wealthy is they make use of aggressive investment vehicles that consistently beat the market.
In market matters, however, reward and risk often move in lockstep. When a bear market or recession hits, the high-growth investments that helped UHNWIs get rich are frequently the first to take a precipitous dive. For this reason, UHNWIs who rely on the markets for income often live with the constant stress of another looming crash.
The Bottom Line
UHNWIs are a small percentage of the global population. Their lives appear to be luxurious: The world in which they live is far removed from that of the majority of the population. And their problems reflect that as well—the bulk of them revolving around managing their financial assets and preserving their wealth.