10% Annualized Volatility 15% FIGURE 31.1 The Jones Family's Efficient Frontier: Expected Real Wealth of Children in 20 Years Net of Income and Transfer Taxes location mix will be identical within each of the three entities. If there is a 10 percent allocation to public equity, 10 percent of each entity will be allocated to public equity. We will, however, allow each entity to choose between taxable and municipal bonds as appropriate. Figure 31.2 shows the improvement in the efficient frontier derived from the estate plan. Based on the 8 percent volatility solution, the expected future real wealth increased by 28 percent, from $20.6 million to $26.3 million. Most of the increase came in a meaningful reduction of estate taxes from $37.3 million to just $12.1 million (in nominal dollars). Now we will introduce asset location. We will use optimization techniques to find the ideal mix of assets and location for varying levels of risk. The optimizer will be allowed to manipulate the allocation to asset class and location according to the following instructions: Maximize: Expected future value net of income and transfer taxes Subject To: Initial grantor trust assets = $8 million Initial direct assets = $15 million Initial retirement assets = $2 million Cash in direct assets £ 4% of direct assets Total hedge fund 5= 10% of total assets Total private equity ^= 15% of total assets Total initial risk ^ X Total final risk S l.l *X