Tax Optimization of Client-Driven Events

By David Gordon, CFA, CPWA, SVP, Direct Indexing

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Most SMA portfolios, whether actively managed or mirroring an index, are not static over time. Clients have life events that can inject new funds into a portfolio (as when a client receives an inheritance or a cash bonus) or require a distribution of funds (as when a client purchases a vacation home, makes a tuition payment, or contemplates a charitable donation).

Managing these events from a tax perspective – that fits each individual client’s unique situation and needs - can be a challenge for any advisor without the right data, technology and time to tackle them. Below are some examples of how Vestmark can help you approach these life-cycle events for your clients.

  • Realizing gains to absorb tax losses generated elsewhere: If a client has sizable unused tax losses elsewhere in his/her portfolio or carried forward from previous years, Vestmark can accelerate gain-harvesting to help use up the unused losses and prolong the usefulness of the SMA portfolio.
  • Termination of an active SMA manager: Rather than liquidating the fired manager’s holdings, you can direct Vestmark’s investment team to allocate them to a client’s direct index SMA and re-optimize the expanded portfolio so that any required position changes are made in the most tax-optimal way.
  • A large cash bonus inspires a charitable impulse: Instead of donating cash to a charity, the client instructs Vestmark to make an in-kind donation of highly appreciated long-term shares, then contributes cash to his/her Vestmark-managed portfolio to fund replacement shares. Since wash-sale rules only apply when a loss has been realized, not when the sale results in a gain, the client effectively “refreshes” cost basis within his/her SMA while also potentially capturing a tax deduction.
  • Cash required to fund a vacation property: Vestmark would seek to sell the highest cost-basis shares to meet the cash requirement with the lowest possible tax cost.
  • Gradual diversification of a concentrated position: For a client with cash and a large exposure to a single stock (such as the stock of a former employer), you can cash-fund an index completion portfolio around the concentration and manage tracking error by eliminating redundant exposures to the same industry. Each year, Vestmark’s investment team can harvest tax losses in the index completion portfolio, reduce the concentrated position (HIFO) to realize an offsetting gain, and invest the cash proceeds of that sale back into the index completion portfolio. As the index completion portfolio grows over time, the harvesting of larger tax losses allows for the tax-neutral sale of lower-basis lots of the concentrated position.

Vestmark has the technology and experience to help advisors tax optimize accounts in a variety of client situations. Contact us to learn more.

Tax optimization services offered by Vestmark Advisory Solutions (VAS). VAS does not provide tax or legal advice.

By David Gordon, CFA, CPWA, SVP, Direct Indexing