Integration of Income and Estate Tax Planning

Abstract

The preservation and transfer of wealth to future generations are among the central financial goals for most high-net-worth families. Using a stylized theoretical model and Monte Carlo simulations, this article quantifies the benefits of income and estate tax planning for growing wealth over generations. The article shows that a family that invests with income and estate tax efficiency in mind can achieve substantially higher wealth levels than a family oblivious to taxes. More important, the article demonstrates that a significant value accrues from integrating income tax efficiency and estate tax planning: Becoming efficient with respect to one tax should make the family even more eager to become efficient with respect to the other.

TOPICS: Wealth management, simulations, portfolio management/multi-asset allocation, performance measurement

Key Findings

• ▪ Using a stylized theoretical model and Monte Carlo simulations, this article quantifies the benefits of income and estate tax planning for growing wealth over generations. The article shows that a family that invests with income and estate tax efficiency in mind can achieve substantially higher wealth levels than a family oblivious to taxes.

• ▪ The article demonstrates that a significant value accrues from integrating income tax efficiency and estate tax planning: Becoming efficient with respect to one tax should make the family even more eager to become efficient with respect to the other.

• ▪ Our conclusions are robust to moderate declines in pre-tax returns, which might occur in pursuit of tax-efficient investing, and to significant increases in statutory annuity rates involved in estate tax planning techniques.