Becoming
wealthy enough to keep the wolf from your door doesn't mean an end to unwanted
callers. For every newly minted billionaire, there are cautionary tales of the
well-heeled undone by visits from the tax man, the loan officer and Uncle Sam
himself.
A fortune requires finesse. As well as a willingness to embrace financial exotica, trips to Bermuda and the drive to start your own business--as a survey of FORBES' knowledge of the world's wealthiest people reveals. Below are seven tricks, secrets and maneuvers regularly conducted by those with more than a shekel or two to accumulate and maintain their fortunes.
A fortune requires finesse. As well as a willingness to embrace financial exotica, trips to Bermuda and the drive to start your own business--as a survey of FORBES' knowledge of the world's wealthiest people reveals. Below are seven tricks, secrets and maneuvers regularly conducted by those with more than a shekel or two to accumulate and maintain their fortunes.
Start Your Own Business
Click
over to FORBES' roll of billionaires, and you'll notice something if you dig
into the biographies. Nearly all of the 1,426 billionaires made their
fortunes through an entrepreneurial spirit (or their fortunes come from a
family member who created the business). Ten-figure sums aren't earned by
rising through corporate ranks. They're made from creating the whole shebang
from scratch. It will likely occur by happenstance, in the most unsuspecting of
ways. Recall that the world's fourth richest man, the aforementioned Buffett,
left the working world in 1955 with plans to retire. Shortly after, cajoled by
a seven-person group of family and friends, twenty something Buffett formed a
partnership that laid the groundwork for his $53.5 billion fortune. He did so
over a small dinner at the Omaha Club.
Put Growth Investments In A Roth
IRA
The
investments with the greatest potential for growth should go into a Roth IRA.
They sit there tax free, and as long as you wait until the age requirement (59
and a half), withdraws won't be levied either. Employees at fast-growing private
companies often go this route. Peter Thiel did it as CEO of PayPal in 2001,
buying 1.7 million shares for 30 cents a share through his Roth. The 2002 eBay
acquisition of PayPal make those shares produce a $31.5 million profit. The man
who founded PayPal with Thiel, Max Levchin, has also done something similar.
His Roth has already sold 3.1 million Yelp shares and holds another 3.9
million. Result: some $95 million that an elder Levchin can withdraw tax free.
Find
Stocks You'll Never Sell
At the forefront of investing
royalty in the last century was an intense man with round glasses from northern
California named Philip Fisher. He became the first to author an investing book
that cracked The New York Times bestseller list with Common Stocks
and Uncommon Profits in 1958. It became an establishing text for modern
growth investing, laying out a 15-point strategy that wound up catching the
attention of a young man from Nebraska: Warren Buffett, who would make tens of
billions of dollars through a combination of Fisher's tenets and those by value
investing founding father Benjamin Graham.
Today, Fisher's son, Ken, is also a
billionaire. He manages a $42 billion asset management company, and still calls
northern California home. The younger Fisher is perhaps more value oriented
than his father--especially favoring the price/sales ratio when assessing a
company's worth--but there's a particular point in his father's work that he
says is never far from his mind. Probably because it plays well in value
investing, too. It's the idea that you buy a stock with the mentality to own it
forever.
Papa Fisher had good reason to buy
and never let go. He faced capital gains rates that topped 45%. (Today's, by
contrast, cap gains are much lower at 20% or so.) He bought DuPont and Dow
Chemical in the 1930s, selling them only four decades or so later. He picked up
Motorola in the 1980s, and still owned shares when he died at age 96 in 2004.
Does such a mentality have a place
in today's world of millisecond trading? "If done right, yes," says
the younger Fisher. "People aren't perfect, though."
Insurance,
Bermuda-Style
Ever heard of these corporations:
Screaming Lord Baltic, Flip-Flop Films or On Nets Above People? Probably not,
unless you're toiling in Warner Brothers' back-office.
Each of those entities were
incorporated by an entertainer, specifically those advised by Scott Feinstein,
who reps celebs like Aaron Paul, Hilary Duff and Taylor Lautner. Feinstein
suggests the maneuver because it allows clients to better manage taxes and
expenses. Celebs many times have trouble deducting some of large business
expenses they face. "These are people paying out like 20% or 40% in
their income in expenses," to people like agents and managers, Feinstein
says. Why can't the silver-screen crowd make the deductions? The Alternative
Minimum Tax, something every American pays. "It effects something like 20
million Americans, and it limits how many expenses you take to eliminate your
taxable income."
To get around this, celebs start a
corporation and instruct producers to pay the corporation, not them directly.
(The government made an exception for entertainers to earn wages this way,
Feinstein says. You, in all likelihood, can not.) The corporation, in turn,
pays the entourage, and the star emerges with a lowered taxable income.
While Feinstein favors this method,
he refuses to take the blame for the oddity of the corporate names: "I
tell them to come up with something that means something to them."
Screaming Lord Baltic. Huh.
Think Like Zuck. Think Trusts
Doubts about Facebook the company's
longevity aside, Mark Zuckerberg and his co-founder Dustin Moskovitz have
already taken steps to secure their family's legacy. As FORBES reported last
March, Zuckerberg and Moskovitz put pre-IPO stock into a type of financial
instrument called a grantor retained annuity trust (GRAT). The pair, by FORBES
estimates, wound up moving more than $200 million to the trusts. Future payouts
will avoid the 45% gift tax that existed (in 2008) when these trusts were created.
Perhaps not as cool as sliding $1 billion past the IRS, but a GRAT is
especially useful for stashing away hard-to-value assets, like private
companies shares, because it allows changes to the trust's details if you're
audited.
Cash Flow Is Important. Buy
MLPs, Sell The Steak House
Where does Brad Pitt put his
multi-million-dollar paychecks? It's not too much to presume that he, like much
of Hollywood, has money invested in master limited partnerships (MLPs).
Conversations with five of Hollywood's top money managers revealed a cult
following for these stocks, which generate strong yields and cash flow. Like
real estate investment trusts, MLPs pay no taxes. Hence, they have more to
share with investors, and payouts are more lightly taxed.
They're certainly more than one-hit
wonders. The Alerian MLP Index's returns beat the S&P 500's on a
1-year, 3-year-, 5-year and 10-year basis. The index, holding some 50 MLPs,
favors gas-and-oil infrastructure companies like Enterprise Products Partners,
Kinder Morgan and Plains All American Pipeline.
Alan Goldman, a Los Angeles
business manager with a star-studded rolodex and client roster, says he's often
left talking his crew out of pitches on the next trendy restaurant, instead
advising more consistent investments, like MLPs. "We find that they need
to be more conservative than Joe Average." Goldman sighs. "The
restaurants are very, very popular with entertainers. We look at something like
a restaurant and just assume that the money is gone."
By Abram Brown
| Forbes April 2013
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