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| Calculated Response |
Less Is More
Russ Alan Prince and Hannah Shaw Grove
11/01/2007
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In a recent telephone survey, we
asked 259 affluent individuals—approximately half had less than $10 million in
net worth and the balance had more—their views on investment performance and tax mitigation (Exhibit 1 below). Our goal was to determine which was more important to
them.
The responses to the survey confirmed two things: Managing a tax
bill is a far greater concern for the wealthy than investment appreciation, and
the more money individuals have, the more passionately they feel about shrinking
their tax burden.
Nearly all of the respondents with a net worth in excess of $25
million ranked tax mitigation as most important (96 percent). Slightly fewer (85
percent) of those with a net worth between $10 million and $25 million agreed,
as did three-quarters of the least wealthy group, commonly referred to as
middle-class millionaires or the working wealthy (Exhibit 2 below).
There are a number of reasons for these results. Some affluent individuals are content with their net worth or are secure in their ability to
generate more, so, consequently, they are interested primarily in maximizing
what they have and preserving principal.
However, we found that for most of the wealthier respondents, the
ability to mitigate taxes will produce a greater "in their pocket return" than
even strong investment performance. And, with the assets they have to work with,
they have the opportunity to utilize various bright-line tax strategies.
Meanwhile, those surveyed who are less wealthy still seek opportunities to grow their net worth, and many are willing to explore the
different options available to them. Also, their more limited pool of personal
assets proves to be more restrictive when considering various bright-line tax
strategies.
Taxes come in numerous forms, so we also questioned our survey
participants about the specific taxes they were most interested in mitigating.
Not surprisingly, the group with the lowest overall net worth thought that
income taxes had the greatest impact on their personal finances. However, those respondents worth between $10 million and $25 million were about evenly split
between income taxes and investment taxes paid on gains and dividends. And while
roughly half of the wealthiest group focused primarily on reducing their investment tax obligation, income and estate taxes also loomed large.
Despite the considerable wealth of the respondents, estate taxes
were of the least concern to everyone—and almost off the radar screen for the
middle-class millionaires (Exhibit 3 above). While estate taxes can be punishing, they
are often not an immediate concern, because the other two types of taxes must be
paid regularly. Furthermore, people discuss estate taxes in the context of
dying, which discourages many people from addressing the matter.
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