Should actively managed mutual funds be held in tax sheltered accounts?  What about limited partnerships?  And how should advisors prepare for potential increases in capital gains rates?

Questions such as these can be answered through an analytical approach to deciding where to “house” assets – in taxable or tax sheltered accounts. 

Glenn Frank is a Senior Investment Strategist for Wachovia Wealth Management, and was the Founding Director of the Master of Personal Financial Planning program at Bentley College in Waltham MA.  He is a member of the program’s advisory board and teaches two portfolio construction courses within the program – Asset Allocation and Investment Vehicles.  He is also the patent holder on “OptiTax” – a software tool which optimizes the location of investments between taxable and tax deferred accounts. 

We spoke with Frank on May 29 to learn how advisors can systematically analyze the tax implications of high-net worth portfolios.

Crafting the Process

“Investment location should be a very tangible step in the overall investment process,” says Frank, adding, “Unfortunately, it is sometimes forgotten or overlooked, given the complexity of ever changing tax laws.”

To improve location decisions, Frank identifies several sequential steps:

• Which asset classes are clients currently using and what embedded capital gains are in these accounts?
• Which asset classes should clients be using after financial planning and risk tolerance has been assessed?
• Which managers are best to capture the targeted asset classes? Are mutual funds or separately managed accounts being employed? Are the managers active or passive?
• After income and estate tax considerations, where should these managers reside (taxable or tax deferred accounts)? 
• What are the tax implications of portfolio rebalancing?

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