Family     Entity Allocation Overall Allocation Direct Holdings         Diversified public equity 26.1%   15.7%   Private equity fund 17.6   10.6   Taxable 10-year AA bond 0.0   0.0   Tax-exempt 5-year bond 52.2   31.3   Taxable money market fund 4.0   2.4   Hedge fund 0.0% 100.0% 0.0% 60.0% 401 (k) Retirement Account         Diversified public equity 0.0%   0.0%   Private equity fund 0.0   0.0   Taxable 10-year AA bond 0.0   0.0   Tax-exempt 5-year bond 0.0   0.0   Taxable money market fund 100.0   8.0   Hedge fund 0.0% 100.0% 0.0% 8.0% Grantor Trust         Diversified public equity 37.0%   11.9%   Private equity fund 9.1   2.9   Taxable 10-year AA bond 3.4   1.1   Tax-exempt 5-year bond 0.0   0.0   Taxable money market fund 19.2   6.1   Hedge fund 31.3% 100.0% 10.0% 32.0%         100.0% volatility solution. The ideal solution includes fl) shifting the higher-return assets into the grantor trust in order to avoid estate taxes on the appreciation they generate, and (2) shifting the more tax inefficient investments into the retirement account or grantor trust where they enjoy tax deferral or tax subsidization via estate tax savings. The optimal solution has two tendencies. First, it shifts more of the expected return into the grantor trust. This reduces future estate tax liability by having more of the family's appreciation outside of the parents' estate. Second, it shifts more tax liability into the grantor trust. This is helpful because income and capital gains tax payments are partially subsidized by future estate tax savings. The family is going to own instruments that generate tax liability. It is better to position them in the grantor trust so that the parents can pay the income tax while allowing the children's assets to grow and compound at pretax rates. In the case where we imposed uniform asset allocation on each entity, the pretax return of the parents' directly held assets was 7.44 percent while the grantor trust was 7.72 percent. The small difference was due to the parents' greater use of municipal bonds. In the optimized solution, the pretax return of the parents' holdings declined to 6.80 percent while the grantor trust rose to 8.51 percent. A grantor trust is a powerful estate-planning vehicle, and it is far more powerful when used in an optimal manner.