Quora Answer: Where Do Wealthy People Store Their Money?

The following is my answer to a Quora question: “Where do the wealthy hold their money?”

The difference between the truly wealthy, and the masses, is how they organise their assets.  For one thing, wealthy people avoid holding their assets, whether property, stocks, or even art, in their name.  Assets belong to companies, trusts and foundations.  Assets held in such entities are considered distinct from the owner of these entities.  This mitigates tax liability, since a company or trust is taxed after liabilities and deductions, whereas an individual is taxed on gross income.  This is significant, because it is possible to expense out many things that we spend on.  Visit your friends overseas flying first class?  Business trip.  Dinner in an expensive restaurant with your buddies?  Business entertainment costs.  Bought a new car? Company asset.

Assets in foundations have tax deductions depending on what the foundation does.  For example, in some parts of the world, including Singapore, there is a tax deduction for donating art to certain institutions.  If that foundation is yours, then you have effectively donated to yourself, and got a tax deduction out of it.  For example, you could buy fine art at a certain price, direct from the artist.  You get it at US$1 million.  You then have it appraised by an appraiser you hired, and it is now US$5 million.  You then make a donation to a foundation you set up, that runs, or is a major donor to a museum.  Depending on the legalities of the place, that donation is tax-deductible up to, perhaps, three times the appraised value.  You now have a tax credit of US$15 million on US$1 million spent.  Should you choose, somewhere down the road, you could even arrange for the foundation to gift you that same piece of art for your services to the community, and hold a gala dinner, raising funds for a charity you started, among donors, for further tax credits.

Assets in companies and trusts are protected from bankruptcy proceedings and asset seizure by creditors.  Assets in trusts are confidential, unlike companies, and you need not disclose them.  Assets in companies may need to be disclosed, but there are ways to hide things in plain sight.  Assets in companies and trusts are also protected from asset seizure and claims in disputes and in acrimonious divorce proceedings.  The problem with pre-nuptial agreements is that they cannot cover everything, and the determined person may find ways around it.  You have to prove each and every item is not a matrimonial asset, in some cases.  But assets in your personal irrevocable trust is considered to belong to a distinct entity - the trust.  This is despite the fact that you can make yourself the settlor, the sole trustee and the sole beneficiary.  It is you giving to yourself.

Another asset class that wealthy like better than normal people is insurance policies.  For example, wealthy people buy a lot of investment-linked plans.  They can easily afford to put money in high performance funds, and get separate, high net worth coverage plans, which are superior to most retail plans.  But when it comes to an investment-linked plan, the coverage is declared, not the funds inside the plan.  For example, a person can easily buy a plan with a regular premium of $2,400 annually.  The coverage may be US$100,000 for death, which is pocket change.  But an investment-linked plan allows you to top up whatever you wish, as long as you can prove in the KYC that you are the legal source of the funds.  A plan that has a face value of US$100,000 coverage could have millions inside.

In some parts of the world, some insurance companies allow withdrawals from the investment-linked plans to be in the form of cheques, and they can be sent anywhere that you specify as the correspondence address, perhaps even a neighbouring country.  That cheque is then cashed in that country, and you have effectively moved money without going through the banking system, and without scrutiny.

The wealthy, and the masses understand finance differently, and are effectively playing a different game.  Unlike the masses, wealthy people understand the need and value of a good financial advisor who understands how the system works, and they will pay for it.  None of the things above are illegal, which is very important.  There is absolutely no need to break the law when you can play with the letter of the law.