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| Calculated Response |
Less Is More
Russ Alan Prince and Hannah Shaw Grove
11/01/2007
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Only one in five respondents had taken any steps to reduce their
taxes, even though most of them expressed interest in doing so. However, there
is a greater disparity when viewed by wealth level. About 60 percent of the
wealthiest segment had already done some advanced planning to manage their
taxes. The rest of the respondents were far less likely to have taken any
action; just 30 percent of the mid-tier group and less than 10 percent of the
least-wealthy group had engaged in tax-planning activities (Exhibit 4 previous page).
Those with greater wealth are in the best position to mitigate
their tax burden. The array of legal strategies that can be employed goes up
nearly exponentially as the level of personal wealth increases. From
international tax arbitrage strategies to the use of captive insurance
companies, and from derivative-based transformational strategies to the use of
special-purpose entities and partnership structures, the wealthy are
better-positioned to use bright-line transactions that can lower their tax
bills.
While roughly half of the wealthiest group focused on reducing their investment tax obligation,
income and estate taxes loomed large. |
Given the abundance of sophisticated strategies, innovative legal
structures and cutting-edge techniques available to accomplish such goals, we
were curious about the apparent disconnect between the respondents’ desire to
mitigate their tax bills and the components of their financial plans. The number
one reason for the inertia was that respondents simply did not know where to
turn to for assistance (Exhibit 5 previous page). When it comes down to it, there are
relatively few people with expertise—often referred to as advanced planning
specialists—in helping the wealthy legally mitigate their taxes. On the other
hand, there are a plethora of charlatans and con artists who pitch tax solutions
that often prove detrimental.
For a much smaller group, there is an aura of uneasiness and
confusion surrounding the process. About a third of the total number of
respondents said that they were uncomfortable with the strategies that were
recommended to them. However, it is worth noting that there is a significant
difference between the least-wealthy and most-wealthy segments: Only 16 percent
of the least-wealthy group cited discomfort, compared with 64 percent of the
wealthiest group; about half of those in the middle expressed concern. This is
due to the fact that the more wealth a person has, the more likely that the
individual will be presented with tax mitigation strategies.
About one-quarter of those surveyed thought that tax mitigation strategies were too complicated to warrant the effort and expense, although the
wealthiest segment was least likely to think so.
Finally, a small group thought the strategies might be illegal.
For these individuals, the idea of taking actions to lower any of their tax
bills is too unnerving to even consider.
It’s no surprise that the wealthy population is unhappy with the
scope of its tax responsibilities. More telling is the degree of importance
wealthy investors place on tax mitigation, especially as compared to investment
performance, and the relative lack of action and resources within a community
that is receptive and in need of the expertise.
Russ Alan Prince is president of Prince & Associates, a market research
and consulting firm for the affluent, and the author of more than 35 books on
related topics. Hannah Shaw Grove, an author and columnist, is an expert on the
behavior, concerns and finances of affluent consumers.
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