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 investable assets in excess of $30 million. 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 the inability to make rent—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 dates to choose from on a Saturday night. These challenges include changing tax codes, estate planning, sustaining their lifestyles during retirement, and protecting their current levels of wealth. 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.

Key Takeaways

  • Ultra-high net-worth individuals have investible assets totaling $30 million or more, and make up about 0.003% of the world's population.
  • High income earners fall into the highest tax bracket, paying a marginal tax rate of 37%.
  • Estates are exempt up to $11.4 million, but anything over that amount is taxed at a maximum tax rate of 40%.
  • UHNWIs generally sustain their lifestyle post-retirement, and continue to boost their bottom lines with aggressive investment strategies.

Who Are Ultra-High Net Worth Individuals?

As mentioned above, an ultra-high net-worth individual (UHNWI) is anyone who has investible assets totaling $30 million or more. These assets, though, don't include real estate, consumer durables, or things like collectibles. People who fall into this category tend to be the most wealthy people in the world, holding a good portion of global wealth. As a group, UHNWIs make up about 0.003% of the world's population.

There were more than 225,000 UHNWIs around the world as of 2018, with more than half living in North America. Some of the wealthiest people in the world who fall into this category include Amazon's CEO Jeff Bezos, 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 seven tax bracket-structure, 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. This rate, taxing ultra-high net-worth individuals has been much higher. As recently as 1980, it was 70%. In 1963, the top tax bracket was a staggering 90%. Politicians and aspiring 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 constant anxiety of a power shift toward those less friendly to their interests.

The provisions put forth through the Tax Cuts and Jobs Act will expire in 2025.

Estate Planning

Ultra-high net-worth individuals worry about sustaining their riches so they can continue to fund their own lifestyles. But most of them also want to retain their riches to pass 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 is bequeathed 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. 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 mean the more the estate is worth—at least it it's above the exemption—the more a UHNWI stands to lose in the passing of his estate. Moreover, many states have their own estate taxes, or as they are called in some states, inheritance taxes, which are imposed on top of the federal estate tax.

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, little distinction exists 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 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 investable assets 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.