When you imagine the richest people you know, whether in real life or on magazine covers, you know that hard work or good luck (or a combination of both) probably played a role in building their fortunes. But keeping that wealth intact for decades—and ensuring it benefits future generations—requires deliberate planning and the right financial tools.
And because you’re working hard to grow and protect your own wealth, you know that building a legacy of financial security takes a lot of effort, too. Still, you may not be sure exactly how the rich safeguard what they’ve worked so hard to build.
To preserve what they’ve built and ensure it’s available for future generations, high net worth individuals turn to a variety of tools, products and strategies, many of which could also help everyday people like you grow and protect their own wealth.
By seeing what the experts GOBankingRates spoke with shared, you’ll realize that the resources you need to achieve these goals aren’t that hard to find.
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For Lukendric A. Washington, certified planner and CEO of Manifest Wealth Management, the question of how the wealthy safeguard their wealth has a very clear answer: diversification. He wants clients to make sure their wealth isn’t bottled up in one type of asset, because if that asset performs poorly, the bottle can break, and with it, their savings.
“In their investment portfolios they probably have a mix of several, if not all, asset classes,” he said. “Beyond typical investment options, there are private equity options, which can be riskier and less liquid, but can also reduce the risk of one event or bad investment destroying your entire portfolio.”
The rich and wise spread their assets across different categories to mitigate the risks that can arise from having too much exposure to a single investment. Smart diversification can occur across industries (for example, having a portfolio with investments in different sectors) or include alternative investments such as precious metals, real estate, or even fine arts.
Washington compares life insurance to the “Swiss army knife of wealth creation.” It is a vivid description of the countless functions that a properly structured life insurance plan can serve.
“If done correctly and structured appropriately, life insurance policies can help fund long-term care needs, enable tax-friendly retirements, and transfer wealth from one generation to the next,” he said.
He is not the only one who thinks the same. Michael Unger, vice president of Investments and Planning at Coral Gables Trust, also praises life insurance for its versatility as an estate planning tool.
“For high-net-worth families, a well-designed policy can provide immediate liquidity to pay estate taxes, so that heirs are not forced to sell assets at an inopportune time,” he said. “It also offers a guaranteed, tax-free death benefit, which can be used to match inheritances between heirs or fund charitable gifts.”
Unger adds that when the policy is owned by an irrevocable life insurance trust (ILIT), the proceeds are kept out of the taxable estate, further minimizing tax exposure.
When wealthy people look to the future, there are many bright and hopeful things they want to see with their families: Weddings. Graduations. Loved ones reaching new stages of success. But they also use estate planning to help ensure that this growth continues even when they are not around to see it in person.
As an estate planning attorney and founder of 2-Hour Lifestyle Lawyer, Laura Cowan knows well how wealthy families can use a combination of wills and trusts to protect their assets and control how they are passed down. He said wills leave instructions about what happens to your assets: who inherits what or who assumes guardianship of young children. However, the downside to wills is that they typically must go through probate court, which Cowan said “can be public, time-consuming and expensive.”
He has seen wealthy people use trusts to anticipate pressing issues, such as taxes or control of a company. For example, a wealthy person could place shares of his or her company in a revocable living trust, which holds assets during his or her lifetime and gives him or her control over who manages and inherits them, so that the business continues to run smoothly even after his or her death. And, most importantly, without any involvement of the courts through probate.
Another type of trust often created by wealthy people is the irrevocable trust, which can help protect assets from creditors and reduce estate taxes, but, as its name suggests, once you’ve set it up, you can’t change it.
Cowan also cites generation-skipping trusts as a way to pass wealth directly to grandchildren, or even later generations, to prevent the family from paying estate taxes twice. With a charitable trust, you can support a cause close to your heart while reaping tax benefits. “For example, a family could create a charitable remainder trust that pays them income during their lifetime and leaves the remainder to a charity when they die,” he said.
The tools the wealthy use to safeguard and share their wealth across generations are not out of reach for people working hard to make their first million. Finding the right resources and learning to use them wisely is the best first step. The next step? Know that you don’t have to do it alone.
“The wealthiest Americans don’t just rely on one tool,” Cowan said. “They use a combination of trusts, family entities, life insurance, gift strategies and charitable funds, all coordinated by a team of advisors, CPAs, insurance agents and estate planning attorneys. Many of these strategies work just as well for everyday families.”
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This article originally appeared on GOBankingRates.com: 3 Tools the Richest Americans Use to Safeguard Their Generational Wealth
