Balancing transparency and control
AS CPAS AND INVESTMENT ADVISORS PARTNER TO
map out a strategy for clients, the delicate balance bet ween
tax effectiveness and control over assets should serve as a
centerpiece. This will help to create a strategy that maximizes investments, minimizes tax exposure, and helps
maintain clients’ long-term financial objectives.
There are a few simple issues that may catalyze portfolio
re-allocation and therefore present an opportunity to re-
calibrate and achieve that desired balance. For example,
If clients choose to go this route,
it will be important for them to
carefully consider tax and
transparency as they allo-
cate investments. Families
with a new pool of liquidity have been trending towards
adoption of an endowment model, which is highly effec-
tive for foundations and employs a structure of “manag-
ers of managers.” But the system is based on a model that
has been designed for non-taxable entities and exposes
investors to consistent movement bet ween asset classes —
shifts that create tax events. For individual investors, while
performance numbers can look exciting in marketing ma-
terials, tax returns can look very different. In the rush to
follow the money, then, families are creating additional tax
exposure and losing transparency to an ill-suited model.
Placing too much cash in insurance can be equally risky.
Life insurance is an excellent vehicle and may help avoid
estate tax, remove tax liabilities, and provide post-mor-
BY CHAT REYNDERS AND MICHAEL LYNCH
tem proceeds; however, the lack of portfolio transparency
can send investors down a crippling path. Funds might
be backed by an insurance company, but policyholders
pay significant after-tax funds to invest in a portfolio with
limited clarity. In short, investors are at the mercy of their
insurers for sound money management.
On the other hand, charitable remainder trusts provide tax benefits, diversification opportunities, and the
desired control over assets. CRTs are an arrangement by
which a donor creates a trust that is generally funded with
low-tax-basis stock, which is often immediately sold and
re-invested in a diversified pool of investments. The donor
gets a current income tax deduction for the present
value of the future interest, which will eventually
pass to a qualified charitable organization. The trust does not
pay a current capital gains tax when
the low-basis investments are
sold, but it does pay an income
stream back to the donor for
an established term, for the life of the donor, or even for
multiple generations if beneficiaries are designated.
A grantor retained annuity trust is another investment
vehicle that acts in a fashion similar to an annuity, as the
trust is created for a designated period of time and makes
payments on a fixed annual basis. The grantor receives
total periodic payments equal to the original trust principal plus interest based on the federal mid-term rate. If the
underlying GRAT assets appreciate more than the federal
mid-term rate, the excess goes to the trust beneficiaries
without incurring a gift tax. This can be an excellent tool
to pass highly volatile investments to your family without
incurring a gift tax.
Investors can also rebalance by putting tax-efficient
investments in regular brokerage (nonqualified) accounts
and tax-inefficient investments in qualified accounts
(IRAs, 401(k)s). This allows for a greater measure of control
over investment selection, as investors can pick their ac-
count managers for non-qualified plans. Even for qualified
retirement plans, managers will often provide guidance.
Chat Reynders is chairman of Boston-based investment
firm Reynders McVeigh Capital Management. Michael
Lynch, CPA, is a principal at Tyler Lynch in Cambridge,
Mass., and specializes in tax planning for high-net-worth individuals.
StockOpter Pro offers substantial value because of its
unique focus and its strong modeling capabilities. It provides an effective replacement for advisor-built spreadsheets for stock option planning, because the input and
strategy wizards save time, increase productivity and
eliminate calculation errors. While it differs from traditional basic analysis programs that focus on external stock
portfolios, it nonetheless serves a critical purpose for those
who carry stock from their own company.
ESTATE PLANNER (FORMERLY ZCALC)
The Tax & Accounting business of Thomson Reuters
The Thomson Reuters Estate Planner is an analytical product and toolset that enhances the practitioner’s ability to
create, analyze and present tax and estate planning strategies. A set of spreadsheet-based models and calculators,
the Estate Planner is tightly integrated with Microsoft Excel and PowerPoint, and makes use of spreadsheet functions and templates to produce reports that are easy for the
client to follow.
In addition to the Estate Planner basic analysis module,
the suite consists of the Function Library, templates and a
presentation generator. The Function Library is an add-in
to Excel that allows the advisor to perform estate, retirement, charitable, financial and tax planning calculations
inside a spreadsheet. It installs over 100 custom functions
that work just like Excel’s built-in functions.
The templates are the same models and calculators
contained in the Estate Planner but provided as regular
Excel spreadsheet files/templates. These templates are
unlocked and fully editable so that they can be modified
and customized with the calculation power of the Func-
tion Library and the presentation power of Excel.