If you have amassed any significant amount of wealth, you have likely recognized federal and state income taxes as your largest potential expenses. Why “potential” expenses? Because some of the ultra-wealthy understand the many ways they can legitimately reduce their income tax burdens if they work with proactive professionals who understand all the tax mitigation options available to successful entrepreneurs.
According to P.J. DiNuzzo, CPA, PFS, MSTx, MBA, and Founder and Lead Consultant of DiNuzzo Middle-Market Family Office and Wall Street Journal bestselling author of the books, The DiNuzzo Middle-Market Family Office™ Breakthrough: Creating Strategic Tax, Risk Cash-Flow and Lifestyle Options for Successful Privately-Held Business Owners and Affluent Families and Don’t Get Killed on Taxes: 20 of the Most Common Reasons You’re Sending Too Much Money to the IRS, “The most typical problems these entrepreneurs face concern paying too much income taxes. And after having experienced the dissatisfaction of overpaying taxes, they reach out to discuss tax mitigation. It’s amazing how many tax mitigation gaps, holes, missed opportunities, and potential untapped opportunities they have. After working with successful, closely held business owners and affluent families since 1989, I’ve realized that four issues account for the primary reasons why so many entrepreneurs have been so unsuccessful in their tax mitigation and tax planning efforts.”
The following are the four issues identified by P.J. DiNuzzo…
Issue #1: Successful entrepreneurs have outgrown the capabilities of some, most, or all of their current advisors.
Most advisors typically serve clients with a net worth between $1 Million and $5 Million. The “toolbox” these advisors work out of is grossly under-qualified to provide solutions in the $10 million to $250 million net worth space.
The primary reason that entrepreneurs maintain these relationships is that they are comfortable. They have worked with their advisors for many years, starting when they earned less money and needed fewer tools. While that is understandable, this comfort may be the most expensive reflexive “comfort” or indecision any of them have ever embraced because the lost opportunities to mitigate taxes frequently cost them hundreds of thousands or even millions of dollars per year or wealth event.
Issue #2: There is no handbook or roadmap for effective tax mitigation for successful entrepreneurs.
Many of the ultra-wealthy are served by high-performing multi-family offices, who have no interest in moving this far downstream to provide their full array of services and expertise. On the other hand, an army of financial advisors and wealth managers would love to move “upstream” and make money off wealthy clients but they are typically way over their heads when they try to serve the more successful group of entrepreneurs.
Successful, closely held business owners who earn more than $1 million in personal income or who have amassed $10 million or more in net worth need a higher level of service for which there is no “handbook” or “roadmap” available. Thus, the less competent financial advisors or wealth managers end up leaving their entrepreneur clients woefully underserved and frequently paying way too much in federal and state income taxes.
Issue #3: Successful entrepreneurs are often making too many “one-off” wealth decisions.
Most successful entrepreneurs make a series of one-off decisions without the guidance of competent professionals who understand the ultra-high-net-worth rules and have access to the entire commensurate toolbox needed to reduce their income tax burden.
These entrepreneurs are busy, they have their long-time core advisors, and topics or needs arise that are beyond their scope, so they often bring in outside specialists to find help. When they do find “help,” they often end up running into people who cannot adequately help them. These professionals are unable to deliver elite wealth planning services.
Issue #4 There is no coordination among their professionals.
Most of the professionals with whom successful entrepreneurs work are focused solely on just what they do. There is no coordination which is regularly critical to optimize tax mitigation. By carefully coordinating the appropriate internal and external professionals it is possible to identify available and viable tax mitigation opportunities for each entrepreneur. Once options are presented and the entrepreneurs decide which opportunities they want to pursue, the tax mitigation efforts are implemented.
Unfortunately, even highly experienced professionals often fail to coordinate with other experts, typically due to their hubris. Resultantly, this can cause mistakes, leave their clients dramatically underserved, and end up with their clients missing out on significant tax mitigation opportunities.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.