TABLE 31.7 Optimal 8 Percent Volatility Solutions

Jones Smith

Annualized nominal return 3.69% 5.56%

Annualized real return 0.67 2.48

Asset Allocation

Diversified public equity 27.5 28.2

Private equity fund 13.5 10.5

Taxable 10-year AA bond 1.1 0.0

Tax-exempt 5-year bond 31.3 22.4

Taxable money market fund 16.6 28.9

Hedge fund 10.0 10.0 100.0% 100.0%

liability was the key strategy for the Joneses while minimizing income and capital gains tax liability was important to Mr. Smith.

CONCLUSIONS

Integration of tax considerations into investment decisions is critical to achieving optimal results. The two subjects are so intertwined that they cannot be dealt with separately.

The estate tax can be the biggest barrier to the transfer of wealth to heirs. There are various estate planning entities that can reduce estate tax liability. Asset location strategies can derive far more utility from these estate planning entities. Shifting appreciation from parents' accounts to children's accounts can be accomplished by having the children hold more of the family's public and private equity. Entities that allow the parents to pay the taxes due on the children's investments can enhance results by allowing the children's assets to grow at the pretax rate. This slows the growth of the parents' assets but, in combination, it reduces estate tax liability by having more of the overall after-tax appreciation occur outside of the parents' estate.

Investors who have more philanthropic intentions are less concerned with estate tax issues and more concerned with minimizing income tax. The less tax they pay, the more that can go to charity. A strategy of shifting more highly taxed investments into tax-advantaged entities such as foundations or CRTs will accomplish this.

Asset location strategies can meaningfully enhance results without necessarily taking on any more risk. Each investor is unique and requires customized analysis and planning.