California dreaming: West coast billionaires see things differently

New breed of HNWIs

However, it seems that this new breed of high net worth individuals (HNWIs) based in the West coast are different from the wealthy elsewhere in the world. Holly Long, vice president of private client services at ABD Insurance & Financial Services, spends her time advising the Silicon Valley elite on protecting their fortunes. She says: “We are now seeing a lot of clients in their late 20s, because of the boom in Silicon Valley, and those people have finished college, started early and had some success in the technology and life sciences industries. They might be renting an apartment or own a condominium. They are probably single and unlikely to have children.”

That means that when it comes to managing their wealth, these first-generation high net worth individuals are far less concerned with leaving assets to their offspring. Stephen Foster, director of international solutions at RBC Wealth Management in San Francisco, says: “We see a lot of people looking at maintaining wealth for philanthropic reasons, and not just to give to their kids.

Indeed, there’s a lot of people on the West coast who think that providing an education for their children, healthcare throughout their life and a home, is enough. They genuinely don’t want to burden their children with too much wealth.”

Just take a look at Mark Zuckerberg, who gave US$1bn in Facebook stock to a charity last year in what was the largest donation in the US in 2013, and made the Facebook founder and chief executive the youngest-ever philanthropist to top the Chronicle of Philanthropy’s annual list of donations. He’s not yet 30.

Jim Cody, managing director of estate, trust and philanthropy services at wealth planning firm CTC Consulting|Harris myCFO, a part of BMO Financial Group, says: “There’s a significant amount of excess wealth that is committed to philanthropic endeavours.” Donations are usually done via donor-advised funds, with the wealthiest and most sophisticated philanthropists using private foundation structures.

Much of the new wealth being generated in the States is coming out of the West coast, from California’s resurgent Silicon Valley tech community. Indeed two of the Forbes top five made their money on the West coast: Bill Gates and Larry Ellison, founder of Oracle.

While the wealth coming out of the emerging markets may be what grabs the headlines right now, the 2013 Forbes Billionaires list serves as a healthy reminder of where a large percentage of the world’s richest people still reside, and that’s in the United States. Of the 1,426 billionaires named by Forbes, some 442 are from the US, compared to 386 from Asia-Pacific, and 336 from the whole of Europe.

Contributors:Holly LongStephen FosterJim Cody

The Golden Gate Bridge, San Francisco

Infinite Loop, Cupertino, Home of Apple, Silicon Valley

Hollywood Boulevard at sunset“We have some of our very large clients who, in addition to making gifts of appreciated stock, are also giving away significant amounts of cash,” says

Cody, “because every year they don’t give away that income they are paying more tax, whereas if they give it to a private foundation they aren’t paying as much tax and the charity gets the additional benefit.”

One of the main issues for people in California is taxation, according to Foster: “If you are resident in California, in addition to federal tax you are also paying California state income taxes, which amounts to about 50% of income for high net worth individuals. People are asking whether

they should be moving to somewhere else in the United States where taxation is going to be lower.”

Wealthy Americans from New York and the West coast are said to be moving billions of dollars in assets to trusts in no-tax states such as Delaware, Nevada and Alaska.

Tech-savvy

The other concern for California’s new breed of high net worth individuals is protecting their privacy. Cody says: “These clients are often very astute regarding what technology might do in terms of invading their privacy. They may be the ones who built the technology that allows people to find things through the internet, but we help clients protect their assets and protect their personal privacy through anonymous LLCs that hold their assets and make it harder to search out ownership through registries.”

Privacy and risk

LLCs can be formed in each of the states of the US, he says, so often rich clients will form an LLC outside of California to purchase a Californian property, making it more difficult for the press to report on their new home. Cody adds: “They use LLCs for privacy, but also to isolate risk within a particular entity, so they may form a specific entity for each individual piece of property that they acquire.”

In terms of structures, offshore trusts and other international trust structures are popular with foreign clients relocating to the West coast, Foster says, or for Americans wishing to consolidate overseas assets. He says: “For a US taxpayer, an offshore trust structure offers no US tax benefits, but if half of their assets are around the world, it maybe makes sense to manage those assets from one place, and that may be in the Caribbean, particularly to maintain privacy and keep a low profile.”

One of the biggest worries for California’s high net worth individuals is not so much wealth growth as wealth preservation. Long, as an insurer, focuses on helping the rich protect their assets. She says: “Business owners might find themselves in their mid-50s, having purchased insurance when they bought their first home, and then renewed automatically every year. At no point have they reviewed their policies.

“These people think about insurance from a catastrophic standpoint. They are quite happy to self-insure, and cover their own losses to a certain level, but they want to be sure they are covered for worst case scenarios.”

Often that leads them to umbrella insurance, which pays out in excess of specified other policies, and covers losses not covered elsewhere, such as injured third parties, employee accidents or unintended effects of goods.

The wealth being generated by IPOs such as Facebook (US$16bn), LinkedIn (US$6.8bn) and Zynga (US$7bn) means one in five ultra wealthy Americans (worth more than $30m) now lives in California. That’s the country’s highest concentration of millionaires; when it comes to wealth management requirements, they are in a league of their own.

/Wealthy Americans from New York and the West coast are said to be moving billions of dollars in assets to trusts in no-tax states such as Delaware, Nevada and Alaska/

Contributors:

Holly LongVice President Private Client Services ABD Insurance & Financial Services California

Stephen FosterDirector International SolutionsRBC Wealth Management Washington

Jim CodyManaging Director CTC Consulting|Harris myCFOCalifornia

© Appleby Global Group Services Ltd 2014. All Rights Reserved.

WEALTH STRUCTURING 20:20 is an Appleby feature publication that aims to tap into the issues facing high net worth individuals around the globe, and investigate the themes and challenges affecting this elite group. Offshore Legal, Fiduciary & Administration Services

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