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Rich investors value protecting wealth over high returns

It's often assumed that financial planning for high-net-worth individuals is all about sophisticated investments and complex strategies that are either too expensive or otherwise off-limits to the general public. However, experts who deal with wealthy clients say those are rarely the focus.

What these financial plans tend to revolve around are fairly basic strategies, such as developing cash-flow models, maxing out retirement accounts, minimizing taxes and creating plans for clients to pass on both their wealth and values to future generations.

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"A lot of high-net-worth clients aren't just about getting the best returns," said Mitchell Kraus, a certified financial planner and owner of Capital Intelligence Associates. "They've built their wealth and want to make sure it's preserved.

"An extra 1 percent on $100 million isn't going to change their life," he added. "Our clients want to pay less in taxes and get good investment returns, but their real goal is to make sure the next generation is prepared."

According to experts, the following strategies are on the top of the priority list when dealing with wealthy clients.

1. Creating a cash-flow model. Neil Waxman, a CFP and managing director of Capital Advisors, said his first course of action is to develop a good cash-flow model to show his clients' expected inflows and outflows and how their current asset base could be affected by their asset allocation.

The model "typically illustrates to clients the probability of reaching and maintaining their financial goals," Waxman said, adding that it then protects capital by preventing clients from making panicked decisions when markets become volatile, or trying to increase returns by moving outside the risk/return parameters of their portfolio.

2. Maximizing retirement contributions. Not surprisingly, tax planning is among the most significant components of financial planning for these clients, and experts say one of the biggies on that front is maximizing contributions to tax-deferred accounts.

While this may seem obvious, Charles Bennett Sachs, a CFP and principal of Private Wealth Counsel, said "it's more impactful than many people think."

"There are multiple [tax-deferred] buckets you can fill up, [and] … a lot of people don't realize how much money they can actually defer," he said. Sachs explained that when Mitt Romney ran for president in 2012 and disclosed his individual retirement account was worth $20 million to $102 million, people wondered how that could happen. This is how.

"With higher tax rates on most forms of income, we have become even more vigilant at minimizing capital gains tax paid by clients via diligent tax-loss harvesting at all times." -Neil Waxman, managing director of Capital Advisors

In addition to maxing out a 401(k) and traditional IRA, Sachs said, people who are self-employed or generate outside income may be eligible to contribute to a SEP IRA, a solo 401(K) or a defined benefit plan. If you're an entrepreneur, you could potentially transfer your company's stock into an IRA.

3. Doing backdoor Roth conversions. Another popular strategy for wealthier people who are ineligible to contribute to a Roth IRA is a "backdoor Roth IRA conversion," in which you contribute money annually to a traditional IRA and then convert it to a Roth.

With Roth IRAs, you pay taxes upfront, so withdrawals are tax-free. You're also not required to take distributions, so the money can continue to grow. (Backdoor conversions are legal but fairly controversial, and many expect they will be outlawed sometime soon.)

4. Lowering income and capital gains taxes. Another focus for Waxman at Capital Advisors is lowering income and capital gains taxes. "With higher tax rates on most forms of income, we have become even more vigilant at minimizing capital gains tax paid by clients via diligent tax-loss harvesting at all times," he said. (Tax-loss harvesting involves selling certain securities at a loss in order to offset gains elsewhere.)

Additionally, he said, "We place active managers in retirement plan accounts when available, find high-quality dividend-paying companies … and increase municipal bond holdings, given the higher tax-effective yield."

Using appreciated stocks to make charitable contributions, as opposed to giving cash, is another tactic that lets you avoid paying the capital gains taxes you would incur if you sold the stock.

5. Avoiding estate taxes. Estate taxes are a thorn in the sides of many high-net-worth clients. However, Sachs at Private Wealth Counsel said that by lowering the value of an estate, this could lessen (or avoid) the blow. And he explained that there are numerous ways to do this. Gifting is one.

Current laws allow an unlimited number of gifts, each totaling up to $14,000 a year, tax-free. For example, you could have 10 friends to which you give $14,000 each, thereby giving away $140,000 without ever having to fill out a tax form. (For 2015, the estate tax exemption is $5.43 million per individual.)

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There are also various trusts that can be established to remove assets from an estate. Irrevocable trusts are often used to transfer out life insurance policies, while Grantor Retained Unitrusts (or Grantor Retained Annuity Trusts, which are similar) allow income-generating assets such as stocks or real estate to be put into trust, although they allow the creator of the trust to continue receiving income from the asset(s).

If a family business is involved, a limited liability company or family limited partnership is an option that transfers the business to the owner's heirs while allowing the owner to retain control.

6. Focusing on philanthropy. Kraus at Capital Intelligence Associates said philanthropy tends to be very important to his clients, many of whom are just as concerned with passing on their values to their heirs as they are their wealth. Charitable remainder trusts (CRT), charitable lead trusts (CLT) and donor-advised funds (DAF) are vehicles that can help accomplish that.

A CRT is an irrevocable trust that is usually funded with appreciated assets. The assets are effectively removed from the estate, which allows for an immediate tax deduction. The grantor (or whomever they choose) can receive income from the trust throughout their life and when the grantor dies the assets go to a nonprofit organization of their choosing.


A CLT is set up similarly; however, a grantor-selected charity receives the income, either for a set number of years or throughout the grantor's life. When the grantor dies, the trust assets are passed on to their heirs.

A DAF is like a savings account that's used for charitable donations. Kraus said it's often a better alternative to a private foundation, which is more complex and costly. Contributions to a DAF warrant an immediate tax deduction, and the donor (and their family, if applicable) has the ability to decide where, when and how much to give.

— By Jennifer Woods, special to CNBC.com