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Your investments can have a material impact on your tax bill: thoughtful choices can defer and even reduce taxes. Magnolia can help you build a portfolio that works harder, by using tax-aware strategies other wealth managers either overlook or can't manage to implement. In addition to some better-known methods of tax deferral, innovative solutions allow our clients to:

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Capturing these opportunities is a one of Magnolia's highly-differentiated capabilities. Our partnership structure and relentless focus on preserving and growing our clients’ after-tax wealth allows us to rapidly identify, diligence, and implement winning strategies from the frontier of tax-aware investing to help them keep more of their hard-earned capital.

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The Overlooked Power of Tax-Aware Investing

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Many widely-held investments are tax-inefficient relative to available alternatives. Common solutions which aim to defer or avoid capital gains may be helpful but are unnecessarily expensive or restrictive compared to newer solutions from the frontier of tax-aware investing.

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Tax-Inefficient Assets

• Taxable Bonds: Bonds are widely considered an essential diversifier in a stock-heavy portfolio, but their income is subject to an investor’s ordinary income tax rate (generally the highest).
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• Mutual Funds (particularly actively-managed stock funds): Whether a mutual fund shareholder sells shares or not, the sale of a security inside the fund can generate a taxable gain. As a result, a shareholder may have to pay taxes for the gains of other shareholders in the fund!
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• Dividend-Paying Stocks: These impose mandatory taxable distributions on shareholders, regardless of whether they choose to reinvest. In addition, stocks chosen primarily for their dividends will almost certainly underperform the broader market.
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Tax-Efficient Alternatives

• Exchange-Traded Funds (ETFs): Rapidly replacing mutual funds as the superior vehicle, ETFs rarely have to pay non-interest distributions. To this degree, “what happens in the fund stays in the fund,” deferring most tax liability until the investor sells shares.
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• Commercial Real Estate Funds: These benefit from favorable tax treatment. Much or all of the (relatively high) income they distribute can be treated as a “return of capital.” Depreciation deductions—unique to real estate and personal property—can also be passed through to shareholders.
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• Limited Partnerships: In some instances, an investment held in an LP will receive more favorable tax treatment than the identical strategy held in a more common fund structure. [These opportunities are limited by investor accreditation.]
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Levers for Deferring and Avoiding Capital Gains Taxes

• Tax-Loss Harvesting: This refers to the sale of assets with embedded losses in order to offset gains in a given tax year. These opportunities become scarcer over time since assets tend to increase in value.
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• Direct Indexing: This allows investors to own the equivalent of an index portfolio with greater tax efficiency than a fund, using tax-loss harvesting principles.
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• Exchange Funds: These pooled investment vehicles allow multiple investors to contribute concentrated stock positions to a more diversified portfolio..
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• 1031 Exchanges: After the sale of an investment property, an investor can make a like-kind exchange and buy a replacement property to defer capital gains taxes. Investors who no longer wish to manage property themselves can instead become passive owners of commercial real estate by choosing from a wide range of Delaware Statutory Trusts (DSTs), which are professionally-managed commingled vehicles.
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• Opportunity Zones: For any kind of capital gain, these investments offer a combination of tax deferral and elimination. As with 1031 exchanges, a number of institutional-caliber investment options are available.

[Given the recent development of superior options (see below), we won’t discuss the mechanics of the first three strategies in detail but are happy to compare them point-by-point privately.]

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Strategies from the Frontier of Tax-Aware Investing

• Better Liquidity Solutions: These are alternatives to common cash substitutes like money market funds and CDs that are subject to preferential capital gains rather than ordinary income tax rates. For instance, Treasury bill returns can be replicated using options strategies to avoid distributing taxable income.

• Generating Capital Losses (without losing actual capital): Finely-calibrated systematic strategies allow investors to generate excess tax losses which they can use to offset gains from taxable events like the sale of a property or business asset, or gains in their portfolio: a versatile tool for diversifying or reducing stock concentration, for instance. [Ask for our white papers on CTAS.]
• Exchanging Higher Tax Rates (e.g., on wages) for Lower Tax Rates: These strategies leverage a deep understanding of tax code structures for limited partnerships to transform ordinary income tax liabilities into preferential ones, like dividends or capital gains. They can be used in combination with the strategy above to reduce and defer income taxes. [Available only to Qualified Purchasers. Ask for our white papers on TALP.]
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• Section 351 Exchanges: This provision of the Code allows investors to contribute their securities to a new exchange-traded fund (ETF) without creating a taxable event and thereby own a more diversified portfolio in a low-cost, tax-efficient vehicle. This strategy is a more flexible and cost-effective alternative to an Exchange Fund.
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Opportunities in a Shifting Landscape

Tax rates and the tax code are subject to sporadic change, but the pace of innovation in tax mitigation strategies has been accelerating. Magnolia’s structure and our relationships within the asset management industry allow us to identify these opportunities—often before our peers—and make them available to our clients in a way many wealth managers can't.

Whether placing assets in the appropriate account type, using widely-known best practices, or implementing advanced tax mitigation strategies, our objective is the same: to maximize your net-of-tax investment returns—the portion of your hard-earned capital that you can keep or pass on to others.

We would be delighted to help identify opportunities to reduce your tax burden, both in crafting your financial plan and taking advantage of strategies from the frontier of tax-aware investing.

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