Investors often hear about the importance of asset allocation – diversifying across stocks, bonds, and other asset classes to balance risk and return. However, in an era of rising tax complexities and evolving financial instruments, one concept deserves equal attention: asset location.
By strategically placing investments in the most tax-efficient accounts, asset location can help reduce tax drag, boost after-tax returns, and align your portfolio with your broader financial and estate planning goals. When combined with advanced tools like permanent life insurance and thoughtful tax strategies, it becomes a critical driver of wealth.
Asset location goes beyond picking what to invest in. It addresses the tax implications of where those assets reside. For high-net-worth individuals and families, the difference between optimal and suboptimal location strategies can equate to tens of thousands, or even millions, of dollars over a lifetime.
Key Account Types and Their Tax Characteristics
The ultimate goal is to ensure that the tax characteristics of each investment align with the tax advantages of the account in which it is held.
Life insurance is often under appreciated as a tax-advantaged vehicle, yet it offers unique benefits that complement asset location strategies, especially for high-net-worth families and business owners.
Tax-Deferred Growth and Tax-Free Access
Permanent life insurance policies, such as whole or indexed universal life, allow the cash value to grow tax-deferred. Policyholders can borrow against the cash value or withdraw funds tax-free, creating a source of tax-efficient liquidity during retirement or for other needs.
Estate Planning Efficiency
For families with significant estates, the death benefit from life insurance provides liquidity to cover estate taxes without liquidating assets. Policies held in irrevocable life insurance trusts (ILITs) can further shield the proceeds from estate taxes, ensuring wealth transfers seamlessly to the next generation.
Legacy and Wealth Accumulation
Using life insurance in conjunction with lifetime gifting strategies amplifies the impact of intergenerational wealth transfers. For example, gifting premiums to fund policies on younger generations builds substantial wealth outside the estate while minimizing gift tax implications.
To truly maximize wealth, asset location strategies must integrate seamlessly with other elements of financial planning, including income tax, estate tax, and charitable giving strategies.
Consider a high-income couple with significant investments in taxable accounts and multiple income streams.
Their portfolio includes a mix of bonds, dividend-paying stocks, and growth equities. By relocating equities to their IRA and municipal bonds to their taxable account, they largely neutralize the impact of ordinary income taxes while benefiting from the same diversification. Simultaneously, they fund a permanent life insurance policy through an ILIT to create a tax-free legacy for their heirs.
The result?
Lower taxes today, higher net worth tomorrow, and a secure legacy for future generations.
Alternative Investments: For accredited investors, assets like private equity and hedge funds may produce significant tax complexity. Housing these in tax-deferred or tax-exempt accounts reduces the burden of annual taxable distributions.
Roth Conversions: Strategic Roth IRA conversions allow investors to reposition assets for future tax-free growth. This pairs well with high-growth investments, maximizing the benefit of the conversion.
Charitable Giving: Pairing asset location with philanthropic goals, such as donating appreciated securities, or gifting from an IRA can further optimize tax outcomes while supporting causes you value.
The intersection of asset location, financial planning, and life insurance requires expertise and a nuanced understanding of tax laws, investment vehicles, and personal goals. Whether you’re a seasoned investor or just beginning to explore advanced strategies, aligning your portfolio to minimize tax drag while maximizing returns is essential.
At Transcend Advisor Group, we believe financial planning is a process. We offer services to help you along every stage of this journey, from evaluating your current situation and determining where you want to go to implementing and monitoring your plan over your lifetime (and beyond).
Contact us today to explore how a strategic approach to asset location can enhance your financial future.
Blair blends the talents of the team through a disciplined and sophisticated individualized planning framework. He is a CFP® (CERTIFIED FINANCIAL PLANNER™) professional and specializes in asset allocation, estate distribution, insurance, and income modeling and solutions.
Phil has spent a career focusing on wealth transfer, charitable desires, and estate planning needs of numerous families throughout the Midwest. As a former pastor, Phil is uniquely experienced in walking alongside people through he peaks and valleys of life. Phil assist clients in getting connected to the people and resources that enrich their lives.
Russ layers over 24 years of tax expertise on top of a financial advisory career that began in 2005. Russ’s deep practical application of the tax code applies a wide lens across a lifetime of taxation to help clients drive the short term decisions that result in long term impacts. Russ also charts the course of our investment portfolios leveraging internal and external teams of CFPs®, CFAs, traders, and Portfolio Managers.