TAX ALPHA

In this conversation on "TAX ALPHA", Frazer Rice and BRENT SULLIVAN (of TAX ALPHA INSIDER) delve into the complexities of tax awareness in investing, focusing on capital gains, income tax, and various strategies for tax efficiency. They discuss the importance of tax loss harvesting, the challenges of managing concentrated portfolios, and the implications of estate planning. The conversation emphasizes the need for advisors and trustees to understand these strategies to optimize tax outcomes for their clients. https://youtu.be/pCIXFq4YoS0 Outline of Tax Alpha Quick Overview of Tax Rates Ordinary vs Capital Gain (Usually Income vs Asset based taxation) Short Term vs Long Term (Long Term Treatment) (we’ll talk about Estate Later) Federal vs State (Can be important!) Netting Losses/Deductions vs Gains and Income Owning assets Taxable vs Non-Taxable vehicles https://open.spotify.com/episode/3uL924aOlPd2hgmC9s7KCI?si=hBS09OKDTd-uHhT8PAj7aA Tax Alpha in stock investing (Universe) Long Only Concentrated Positions Timing – Getting LT Capital Gain treatment Basis – increasing basis Exchange / 351 Funds to defer and diversify Dramatic foreshadowing with step-up later in estate context Blind Trusts for political appointees Diversified Positions Passive (Lower Cost, acceptable returns, “lower risk/tracking error”) Active (Now frowned upon – except in the after tax world w/ TLH) Deferral Carve-Outs like QOZ’s Tax Lost Harvesting Owning an index vs owning a sample of the index Buying Coke and selling pepsi Wash Rules Loss Carry Forwards Capital Losses / Not Ordiany Losses Amplified Tax Loss Harvesting Own the sample of Index AND Borrow off those holdings to create long and short positions to generate capital losses while having beta of 1 Trends: Pre-Liquidity Event planning Storing Losses for the bulky sale Timing the event(s) to have the losses line up with the gains Pre-Diversification planning Pre Death Planning Integrating the Estate Planning with the Income/ Cap Gains Planning Step-Up Avoiding Estate Tax, But Prolonging the Cap Gains Tax exposure (and concentration risk?) Grantor Tax status and he swap power How does turbo charged loss creation look in an estate environment? Trustee/ Executor and Fiduciary / Beneficiary risk issues Vehicle evolution Funds SMA’s 351 and other ETF vehicles (+/-‘s) PPLI,PPVA How did you develop this expertise? How do we find you? Transcript of Tax Alpha Frazer Rice (00:01.122)Welcome aboard, Brent. Brent Sullivan (00:03.035)Well, happy to be here, Fraser. Frazer Rice (00:04.558)It's fun to chat in person. I've been following it to call a blog I don't think gives it the proper respect because I think you're uncovering a lot of great information for advisors like me and wealthy people and other people generally speaking in terms of Really getting going on the tax alpha end of it Let's start a little bit with some basics because I think you know for someone new to the concept of Being particularly tax aware in terms of investing taxes can be, they're more than just income tax, that's for sure. How do you think about it? How do you get your framework around what people are trying to avoid when they're dealing with their investable portfolios? Brent Sullivan (00:45.723)Yeah, I mean, there are really just a couple of different ways to break it down, but I probably start with the concept of a capital gain as a distinct thing from income tax. so capital gains come in really like four different flavors. There's short-term capital gains, short-term capital losses, and then long-term capital gains, long-term capital losses. And then these things are different if you have collectibles or other types of instruments too. But the point is here that you've got those four quadrants that you're always sort of operating in. And I think that's where the management and the prowess around portfolio design, execution, that's where all of that really comes into play. And the final point I'd make about capital gains versus income is that capital gains is really a planning opportunity. Income is gonna come at you and there's really not much you can do about it. Strong caveat to that. But capital gains are really about timing. You can accelerate losses, you can defer gains. Frazer Rice (01:37.929)Right. Brent Sullivan (01:45.079)And that's really the beginning of the conversation when I'm talking with advisors about this usually. I operate in B2B space, I'm not retail facing. And usually that's where the planning conversation starts. Frazer Rice (01:57.655)So as you sort of step back and help people think about the tax planning aspect of it, for advisors generally speaking, they're very interested not only in the investment perspective, but the structuring of wealth such that they're taking advantage of what they can and mitigating that which is destructive, but otherwise not really something they can avoid. If we settle in a little bit on the investment piece a little bit, what is the universe that we're looking in in terms of how people allocate their portfolios? Brent Sullivan (02:33.22)Well, mean, so probably I'd say the hot topic in tax management nowadays is really getting the portfolio to be more equity like. And so the reason or part of the motivation for more equity like exposure is to utilize to the extent possible the planning opportunity of capital gains, realization and acceleration and things like that. So that's that's probably the core concept. The biggest chunk of the investable portfolio. The idea is to make it more equity like. And then the planning opportunities sort of expand beyond the core portfolio. That's in, you know, how can we align total diversified exposure across the right types of investment accounts? In your space, it starts to get really interesting. You know, I say your space, like in a state planning world, it starts to get, you know, the idea of asset location, putting the stocks, you know, in the high growth portfolios or tax exempt portfolios, depending on the profile. Frazer Rice (03:17.228)Sure. Brent Sullivan (03:26.458)Putting the bonds in tax advantaged accounts or tax exempt accounts, again, depending on the profile. All of that is like, these are like really crisp, interesting planning questions that do not have crisp answers. And I think that's where the planning opportunity really emerges. Frazer Rice (03:42.668)We talk a little bit about asset location. The investment vehicles we'll talk about shortly and some of the things that can happen to turn the dials on that front. But in terms of location in whether ERISA accounts or life insurance or trusts or things like that, as people are trying to get their arms around the matrix, as you called it, and certainly with the capital gains and short and long, there's almost a matrix of different things you can think about in terms of the tools in your toolkit. How do you get your arms around that if you're new to the space or otherwise trying to really provide subtle advice as opposed to maybe speculative advice? Brent Sullivan (04:23.214)Yeah, I mean, I think that the first step is really trying to understand how each investment decision impacts not just the current investment returns, but also future investment returns, after-tax returns, pre-liquidation, post-liquidation, but then also estate considerations, like are you choosing the right vehicle if you're trying to isolate or exclude assets from the estate? Do you want to keep a strategy on for multi-generations? Is it private? Public? Is it liquid? Iliquid? Inflation protected? All this kind of stuff. You have to realize that every single investment decision involves or impacts this really complex ecosystem. It's super interesting, but I think like first order decision is like how much of a thing should I own? That is just like the tip of the iceberg. And I would say that's where 99 % of like the financial media focuses. You how should I invest a million dollars now? It's like, no, boy. Like there's so much more ground to cover that could make portfolios resilient today, but also with multi-generation in mind. Frazer Rice (05:29.835)As I like to say, trying to get past the two dimensions that most people are normally thinking about in terms of the X and Y of income and capital gains and then sort of layering on asset allocation to be responsible on that front, but then add the Z axis of the estate planning, really kind of years 10, 15, 20, and then going beyond your use of the assets to different constituencies that are going to benefit from it later. Brent Sullivan (05:55.365)I mean, I get so excited when I think about the opportunities in this space because they're so messy and bespoke. And I say messy in a good way. These are real problems that planners have an opportunity to step in and address for high net worth folks. really, down market, I don't say down market in a pejorative sense, but mean, in down market too, there are really opportunities for planners to step in and add meaningful value and like again, I am an observer of this industry. I'm an independent tax analyst, which means that I don't have a stake in the game. I don't, I'm not trying to sell anyone's product. So I just get to see the opportunities that planners have when they're engaging with, with clients at all wealth levels. And again, like to your point, yeah, multi-generation is super exciting. It's so messy and interesting. Frazer Rice (06:43.755)As we look at it here, the one unifying theme is most people don't want to pay taxes if they don't have to. success really does come down to what do you get to keep at the end of the day from the fruits of your labor or your investment. Without that unifying principle, then we're sort of grasping at straws I guess.