This case study is based on an actual Ballentine Partners client family and outlines best practices for maximizing client after-tax returns using a number of techniques including asset allocation planning, asset location planning, and active tax management of portfolios. While the strategies and results described are real and verifiable, the details of the client’s background information have been altered to maintain confidentiality.
The article describes best practices for maximizing client after-tax returns using a number of techniques, including asset allocation planning, asset location planning, and active tax management of portfolios. For example, in the case of the clients described in this case study:
During the period of 2007-2014, the clients received about $7.5 million of interest and dividend income, but paid tax on only about $2.5 million of interest and dividend income. The $5m balance of the income that would have otherwise been subject to current taxation was sheltered from tax through our asset location and active tax management strategies. The majority of this income was generated through tax-exempt municipal bonds or within tax-deferred accounts. There was no tax audit risk associated with this.
During the market crash of 2008, we generated tax benefits worth about $1.5 million to be used in future years. Those tax benefits reduced the impact of market losses during 2008 and more than offset all capital gain tax liabilities in all years since 2008 combined. The client still has a tax benefit of about $500,0001 to use in future years.
Through our asset location planning, the client was able to transfer about $1.25 million tax-free to future generations. We were able to achieve this in spite of the fact that the clients had previously exhausted their lifetime gift allowance. The successful wealth transfer strategy avoided about $500,000 of gift tax that otherwise would have been due immediately, and avoided a much larger estate tax that would have eventually applied if the assets had continued to grow inside the clients’ estate.
By strategically locating assets in a tax-aware manner and realizing losses throughout each year (rather than waiting until the end of year), Ballentine Partners added over $1,000,000 of value on top of the reported investment returns we generated during the period. The value added from this integrated advice offset 76% of Ballentine Partners’ advisory fees.