3 Strategies The Affluent Use For Effective Wealth Generation

According to the Social Security Administration, the top 1% of earners in the U.S. earn at least $785,968 annually , which is a lot of money to manage.

Investing, preserving, and growing wealth at this scale requires knowledge, tools and expertise. Here are some of the top proven strategies that the affluent use to safeguard and amplify their assets—all of which are reproducible on a smaller scale.

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1. Leverage Life Insurance

Life insurance is typically seen as a safety net, and term life insurance falls under that category. Whole life insurance, a permanent form of life insurance, crosses the line from a preserver to a grower of wealth.

The wealthy use whole life insurance as a legally safe investment vehicle. Nick Robb, managing director of PH Robb , which advises the country’s wealthiest families, points out, “The most common need for permanent life insurance coverage is for estate planning for High-Net-Worth families, who use the death benefit to pay some or all the estate taxes due at death.”

Robb adds that whole life insurance has a growth component, as well. Individuals can access and borrow cash in certain ways without triggering a taxable event. Premium payments beyond the cost of insurance collect dividends, too. He explains, “If the life insurance policy is structured correctly to comply with IRS Tax Code 7702, any growth of the cash value account will be exempt from income taxes.”

If you want to create a sound wealth-generation strategy, don’t overlook the utility of whole life insurance. Use it as a dual safeguard and asset appreciation tool.

2. Implement Robust Estate Planning

In a similar vein to insurance, trusts are another form of weather preservation. In this case, they support a strong sense of long-term stability as a cornerstone of the estate planning toolkit. A trust can provide asset protection and minimize estate tax. It also helps maintain more control over the distribution of your wealth.

Trusts can avoid unnecessary drama and cost in the probate process. The Kiplinger Advisor Collective explains, “Probate can take years and is public and costly. A general rule of thumb is to assume that about 10% of your gross value will be used to cover the cost of those exact assets going through probate. That monetary value alone is a great tangible reason why people should have a trust—not to mention the emotional intangible value-add a trust comes with.”

Trusts have different structures. You can use a living trust to maintain flexibility during the grantor’s lifetime. Irrevocable trusts are more rigid but offer better tax benefits and asset protection. In either case, a trust can protect wealth—and avoid unnecessary wealth erosion at the time of transfer.

If you have a sizable number of assets to manage, consider how a trust can factor into the equation. How can you use one to mitigate estate taxes, provide privacy, and protect assets from creditors and legal claims?

3. Prioritize Tax-Efficient Investing

The way you invest can make a big difference in how much of your wealth ends up in the hands of the government instead of your own bank account. Often, tax-efficient investing boils down to the savvy use of the right investment vehicles and strategies—something wealthy investors are always careful to consider.

For instance, high-net-worth individuals invest in tax-advantaged accounts.

Tax-loss harvesting is also a common strategy. Investors will sell certain assets at a loss to reduce taxable gains in a given tax period. Strategically positioning certain assets can also reduce taxes. For instance, when it comes to stock funds, Investopedia says, “Tax-managed funds and exchange-traded funds (ETFs) tend to be more tax-efficient because they trigger fewer capital gains. Actively managed funds tend to buy and sell securities often and can generate more capital gains distributions and more taxes.”

If you want to invest like the affluent, you must consider the tax implications of every financial move you make.

From using tools like trusts and whole life insurance to considering tax implications, there are multiple ways you can position your investing to reflect the strategies of the wealthy. The key is doing your research and finding how to use the techniques of the uber-wealthy in your own investing lifestyle.

By Jaime Catmull, Contributor