Increasing the Tax-Effectiveness of Concentrated Wealth Strategies

Abstract

This article starts with the observation that, despite many solid reasons pointing in the opposite direction, many investors continue to hold overly concentrated positions, particularly with respect to low basis, at times legacy stocks. The authors then remark that investors that do understand the need for protection and/or diversification are faced with multiple strategies for accomplishing their goal. Although charitable and/or gifting strategies (charitable remainder trusts, private foundations, donor advised funds, etc.) are viable alternatives, they focus on increasing the tax efficiency of variable prepaid forwards (VPFs), one of the most commonly used financial strategies. Their purpose is to explore the concept that integrating VPF hedging strategies with a tax-enhanced reinvestment portfolio may improve the effectiveness of the VPF as a diversification strategy. Using an actual (but disguised) case study, the authors present a realistic investor scenario and then illustrate how the combination of a VPF with a tax-enhanced reinvestment portfolio can improve the overall effectiveness of the diversification strategy.