Tax planning is a key element of our Estate & Wealth Planning offerings at Ancora. We know that sophisticated tax strategies can offer significant value to our clients, and we continue to seek new and effective tools to address these needs. One of the most persistent topics is the mitigation of capital gains taxes. Whether it’s a significant liquidity event or dealing with appreciated or concentrated positions in a portfolio, many clients seek ideas to improve tax efficiency.
Recently, we have seen a lot of interest and have successfully been deploying two specific tax-efficient strategies that can function within a client’s portfolio. Each of them utilizes tax-loss harvesting, which, as a reminder, is a practice used in taxable accounts of selling investments that have declined in value and realizing a capital loss. Those losses can then be used to offset realized capital gains, thereby lowering an investor’s overall tax bill. This practice does not mean that a portfolio’s growth will be stunted in return. The proceeds generated from the loss sale can be redeployed into a new holding, maintaining the proper allocation and risk levels of the overall portfolio strategy.
The first solution we’ve been utilizing is best for scenarios where there is fresh capital (cash) to be deployed. In this case, we partner with a third party to utilize their long-only direct-indexing approach. These accounts are designed to help taxable investors systematically reduce their tax bill while staying closely aligned to a chosen market benchmark. Instead of owning a single ETF or mutual fund, investors own most of the individual stocks that make up an index in a separately managed account. This structure allows for continuous monitoring of each security and harvesting losses at the individual stock level when prices decline, even when the overall market is up.
When a loss is realized, the proceeds are reinvested into similar securities to maintain market exposure while avoiding wash sales. (A wash sale occurs when an investor sells a security at a loss and, within 30 days before or after that sale, buys the same or “substantially identical” security. The IRS restricts this to prevent investors from claiming tax losses while maintaining their market position.) Over time, this process intends to generate a steady stream of capital losses that may be used to offset realized capital gains or income, with the goal of improving after-tax returns. The strategy is highly customizable; investors can tailor benchmarks, exclude specific stocks or sectors, incorporate ESG preferences and coordinate with existing holdings, allowing for greater tax efficiency without materially changing an investment risk profile.
The second solution is best for scenarios where investors have existing investments that are either highly appreciated or concentrated. In these cases, we partner with a third-party to structure a separately managed account that is designed to generate tax benefits (or tax alpha; excess return) while maintaining the core equity exposure by utilizing the existing portfolio assets as collateral for a long/short portfolio extension. This eliminates the need for additional cash while enabling tax-loss harvesting to be generated in both rising and falling markets.
There are three long/short solutions: 1) combines core equity exposure with tax alpha for investors with or without existing tax-loss harvesting strategies, 2) enhances the tax efficiency of highly appreciated legacy holdings and 3) helps investors transition out of concentrated stock positions in a diversified, tax-efficient manner. These solutions represent one of the industry’s earliest and most comprehensive long/short tax-loss harvesting solutions built specifically to improve after-tax wealth for sophisticated investors. While we feel this solution has great application for certain clients, it is complex and not without associated risk.
Ancora’s Estate & Wealth Planning team seeks and evaluates various tools, strategies and opportunities to add value for our clients. While no tax strategy is universally appropriate, portfolio construction and tax planning can work together powerfully with thoughtful implementation. As always, our team would be happy to discuss these and other solutions in more detail.