One of the (legal) tricks that the ultra-wealthy use to keep their wealth is to structure their finances in a way that minimizes taxable income without minimizing cash flow. The classic example is of the CEO who pays himself $1, but then borrows against his stock in the company and uses that money to buy mansions and luxury cars. But such a plan is not without its flaws; what if the CEO’s company is faced with scandal and shares crash?
When it comes to tax planning, knowing the arcane, esoteric, and mind-numbing art of optimizing the tax code is one side of the coin. The other side is creating a portfolio of assets and a structure of those assets that ensures the risks introduced by the tax planning do not result in financial ruin.
A simple exercise to this end would be in modeling leverage ratios and ensuring that the amount that a portfolio is leveraged to optimize its tax position does not exceed regulatory or contractual limits, thus resulting in a margin call or another kind of trigger. Another important aspect of financial risk modeling for tax optimization would be creating diversified cash flows from various sources; it needn’t all be from borrowing (nor should it).
Another important aspect of optimizing for risk as well as for tax obligations is taking into account the amount of money that must be spent on tax-deductible expenses. While charity comes to mind, an ultra-wealthy owner of several businesses may find the cash flows between businesses and the needs for capital expenditure between them to create opportunities to minimize taxes and to minimize risks in her companies.
Wealth management is not often looked upon in high finance as the most glamorous or well-paying part of finance, but the multidimensional challenges that financiers face in this pocket of the industry are significant, and they provide opportunities for very complex thinking and analysis that has significant value. That value is not lost on clients, and the best clients know to reward their best wealth managers well.