Tax-Efficient Investment Strategies for High-Net-Worth Investors

Taxes can have a meaningful effect on long-term investment results. For high-net-worth investors, the challenge can be particularly complex because wealth may be spread across taxable accounts, retirement accounts, concentrated stock positions, business interests, charitable assets, and other investments.

Tax-efficient investing does not mean making investment decisions solely to reduce taxes. Instead, it involves considering tax consequences alongside portfolio risk, liquidity, diversification, costs, and long-term financial objectives.

Tax-Loss Harvesting

Tax-loss harvesting involves selling an investment that has declined below its tax basis and using the realized loss to offset realized capital gains, subject to applicable tax rules.

If the investor wants to maintain similar market exposure, another investment may be purchased. Care is required, however, because wash-sale rules can affect whether a loss is currently deductible.

The investment decision should come first.

Selling an investment solely to generate a tax loss may unintentionally change the portfolio's allocation or risk profile. A tax-loss harvesting strategy should therefore consider the investor's overall portfolio, tax lots, investment objectives, and transactions across relevant accounts.

Opportunities may also arise throughout the year rather than only during year-end tax planning.

Consider Asset Location

Asset allocation determines which investments an investor owns. Asset location considers where those investments are held.

Taxable accounts, traditional retirement accounts, Roth accounts, and other tax-advantaged accounts may receive different tax treatment. Holding particular investments in particular account types can therefore affect the portfolio's after-tax results.

For example, investments that regularly generate taxable income may warrant different placement from tax-efficient, low-turnover investments.

The analysis should not be reduced to a simple formula. Investors must also consider liquidity, withdrawal requirements, expected holding periods, future tax circumstances, and the purpose of each account.

Asset location works best when the entire household balance sheet is evaluated together.

Rebalance With Taxes in Mind

Portfolio rebalancing can create taxable gains when appreciated securities are sold.

Before selling investments in a taxable account, investors may be able to consider whether new contributions, distributions, or trades within tax-advantaged accounts can help restore the desired allocation.

When taxable sales are necessary, tax-lot selection may also matter. Different lots of the same security may have different purchase dates and cost bases, creating different tax consequences when sold.

Tax considerations should not prevent necessary risk management. Holding an inappropriate or excessively concentrated investment solely to avoid realizing a gain can introduce risks that outweigh the potential tax benefit.

The objective is to manage taxes within the investment strategy rather than allowing taxes to determine the strategy.

Evaluate Municipal Bonds on an After-Tax Basis

Municipal bonds may provide federally tax-exempt interest and, depending on the security and investor's circumstances, may receive favorable state or local tax treatment.

That does not automatically make a municipal bond preferable to a taxable bond.

Investors should compare potential income on an after-tax basis while also considering credit quality, maturity, interest-rate risk, liquidity, call provisions, and diversification.

State-specific treatment may also affect the analysis.

Municipal bonds remain investments with risks. Their potential tax advantages should be considered as one part of the fixed-income decision rather than as a substitute for evaluating the underlying security.

Coordinate Charitable Giving With the Portfolio

Charitable planning may create opportunities to coordinate philanthropic objectives with investment and tax planning.

For example, an investor who intends to make a charitable contribution may consider donating eligible appreciated securities rather than selling the securities and contributing cash.

A donor-advised fund may also provide a structure for making a charitable contribution while recommending grants to eligible charities over time.

These strategies can be particularly relevant when an investor has appreciated assets or experiences an unusually high-income year.

Charitable planning should begin with genuine philanthropic objectives. Deduction limits, valuation requirements, holding periods, and other tax rules should be reviewed with qualified tax professionals before assets are transferred.

Consider Roth Conversions as Part of Multiyear Planning

A Roth conversion moves assets from an eligible pre-tax retirement account to a Roth account and generally creates taxable income in the year of conversion.

The decision may be worth evaluating during periods when an investor's taxable income is temporarily lower or when broader retirement and estate-planning circumstances make future tax flexibility important.

A conversion should generally be modeled across multiple years rather than evaluated as an isolated transaction.

Current and projected income, available funds for paying taxes, future withdrawals, required distributions, Medicare-related considerations, estate objectives, and future tax uncertainty may all affect the analysis.

A Roth conversion creates a current tax cost in exchange for different future tax treatment. Whether that tradeoff is appropriate depends on the investor's individual circumstances.

Address Concentrated Wealth Carefully

Executives, founders, and business owners may hold a substantial portion of their wealth in one company.

Reducing that concentration can create significant capital gains, but maintaining the position also creates company-specific investment risk.

A coordinated diversification strategy may consider staged sales, charitable gifts, tax-loss harvesting opportunities, and other approaches appropriate to the investor's circumstances.

Some investors may also evaluate specialized strategies such as exchange funds. These arrangements can involve significant eligibility requirements, costs, liquidity restrictions, investment risks, and tax considerations and therefore require careful professional review.

Tax deferral should not be confused with risk reduction. A strategy that postpones taxes may still leave the investor exposed to investment, liquidity, or other risks.

Review Qualified Small Business Stock Before a Liquidity Event

Founders and early investors may hold stock that could qualify for special federal tax treatment under the rules governing Qualified Small Business Stock, commonly known as QSBS.

Eligibility depends on detailed requirements involving the company, the manner in which the shares were acquired, holding periods, and other factors.

Because the analysis is fact-specific, investors should not assume that shares qualify simply because the company or investment was described as QSBS.

Documentation can be particularly important. Corporate records, issuance information, transaction history, and other materials may be needed to support the tax position.

Potential QSBS treatment should therefore be reviewed with qualified tax and legal professionals well before a contemplated sale or other liquidity event.

Keep Investment Decisions and Tax Decisions Connected

Tax-efficient investing is most effective when strategies are evaluated together rather than independently.

Tax-loss harvesting can affect rebalancing. Asset location can influence which account should hold a particular investment. Charitable giving may affect the disposition of appreciated securities. A business sale may change income, liquidity, and diversification needs simultaneously.

A useful planning process may begin by identifying:

• Taxable, tax-deferred, and tax-free accounts

• Unrealized gains and losses

• Concentrated positions

• Expected income changes

• Upcoming business or liquidity events

• Charitable objectives

• Near-term spending needs

• Estate and legacy considerations

That information can help investment, tax, and legal professionals evaluate how different decisions interact.

Tax Efficiency Should Support the Investment Plan

The goal of tax-efficient investing is not necessarily to minimize taxes in any single year.

An investor may appropriately realize a taxable gain to reduce concentration, generate needed liquidity, rebalance a portfolio, or accomplish another financial objective. Conversely, deferring a tax liability may be useful only when doing so remains consistent with the investor's broader strategy.

At Parkview Partners Capital Management, tax considerations can be incorporated into investment planning while coordinating, when appropriate, with a client's tax and legal professionals.

Tax laws and individual circumstances can change, and no single tax strategy is appropriate for every investor. A coordinated process can help investors evaluate taxes alongside risk, diversification, liquidity, and long-term financial objectives rather than allowing any one consideration to drive the portfolio. At Parkview Partners Capital Management, we understand the complexities of building a lasting legacy. To discuss how these strategies might apply to your specific situation, contact our team for a personalized consultation.