Tax-Efficient Asset Allocation

Tax-Efficient Asset Allocation

by Richard C. Wilson & Family Offices Group Association Team

Family Office Definition: Tax-Efficient Asset Allocation

Tax-Efficient Asset Allocation definition:  Tax-efficient asset allocation refers to the practice by wealth managers to place more tax-efficient investments (such as long-term stock holdings) in taxable accounts and the most tax-costly investments (such as fixed income or short term/high turnover stocks) in tax-deferred or tax-free accounts.  The reasoning behind this strategy is that long-term capital gains tax rate is lower than interest income and short-term capital gains tax rates.  Those investments with high amounts of interest income and short-term capital gains should be sheltered in a tax-deferred or tax-free account.  Stocks placed in a taxable account can grow without incurring capital gains tax until sold, may be harvested for losses, step up in basis at the date of death, and can be gifted to charity without incurring capital gains tax.

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