Tax-Advantaged Solutions to Help Keep Taxes Low in 2011 and Beyond

Jun 16th 2011
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By Tim Mezhlumov, director, advanced markets, 1st Global

Although the two-year extension of Bush-era tax cuts will keep tax rates unchanged, tax-efficient investment portfolio construction and the utilization of tax-efficient strategies will have a more significant effect on the net after-tax income and wealth your clients can ultimately pass on to the next generation. Tax-centric financial advisors who are ready to offer these solutions are well-positioned to benefit their existing clients and acquire new ones, and CPA firms that offer wealth management are ideally suited for the task.

Let's take a look at the tax-advantaged investments and strategies that will help to address these tax law changes and keep taxes low this year and beyond.



Zero-premium collar is a way of reducing the downside price risk associated with a concentrated equity position that does not require a stock sale, helping to avoid capital gain recognition. Investors enter into a customized contract with an institutional counterpart to receive "stock protection" in exchange for limiting the upside in the stock during the term of the contract. The collar is a way to reduce price risk and provide overall stability to a portfolio. Although the potential upside in the stock is limited, many investors agree that a cap on upside potential well above the current price is a reasonable consideration for the security and peace of mind of gaining downside price protection.

Oil and natural gas programs provide an upfront 85 to 100 percent of the investment amount deduction for intangible drilling costs. These programs are designed to subsequently provide income that is based on the underlying price of oil or natural gas. In addition, they may also provide future equipment depreciation deductions. .Please note that there are special risks of investing in Limited Partnerships such as lack of liquidity and potential adverse economic and regulatory changes. Cash used for operations may cause monthly cash distributions to be deferred or decrease permanently. For this reason, there are minimum suitability standards that must be met. Investors should read the prospectus carefully before investing.

Municipal bonds provide current income, which is typically exempt from federal income tax and may be exempt from state income tax for investors who reside in the state of issue.

Exchange-traded funds (ETFs) are typically more tax-efficient than mutual funds due to the investor's ability to control capital gain recognition. These are low-cost, passive investments that mirror an index, industry or sector, geographical region or country (it is not possible to invest directly in an index).

Separately Managed Accounts (SMAs) are typically more tax-efficient than mutual funds because SMA investors actually own individual securities. This allows money managers to control capital gains recognition, avoid income-producing investments and harvest capital losses to offset capital gains.

Retirement Plans


Individual retirement accounts (IRAs) may provide an upfront tax deduction, as in a case of traditional IRA, depending on the client's adjusted gross income (AGI). Roth IRA contributions are not deductible. The earnings grow tax-deferred in both IRA types and may be withdrawn income-tax-free from Roth IRAs as long as the distributions are qualified distributions. These plans offer a wide range of investment options including stocks, bonds, mutual funds and ETFs.

Company retirement plans provide an upfront tax deduction to the company and its participating employees. These plans typically offer mutual fund investment options, although it is possible to have a much wider range of investment choices with self-directed and pooled plans.

Employee stock ownership plans (ESOPs) are qualified plans that can be used to purchase stock of the sponsoring company. This allows owners of private, closely held companies to sell their stock to an ESOP for cash or a note and reinvest the proceeds via Section 1042 rollover that enables to defer recognition of capital gain on the sale.

Insurance Solutions


Deferred annuities can guarantee the principle, lifetime income, and amount that will ultimately pass to heirs. While contributions are made with after-tax dollars, earnings are tax-deferred. These programs also offer tax-advantaged income distribution options in the form of annuity payments that may be partly excluded from income tax. Guarantees are based on the claims-paying ability of the underlying insurance company.

Asset-based long-term care (LTC) insurance funding entails using an existing deferred annuity contract that has earnings to fund LTC insurance premiums. Starting in 2010, earnings may be income-tax-free when used to fund qualified LTC insurance premiums. In addition, payments pursuant to certain LTC annuity riders may also be income tax free when used to fund LTC insurance premiums.

Non-qualified deferred compensation plans are typically utilized to benefit business owners, executives, and key employees by allowing these individuals to avoid recognizing the income until the occurrence of a specific triggering event, typically retirement. These plans may also provide an immediate upfront deduction to the company, although not all do. In addition, these plans may enable the employee to spread out the income tax liability when deferred compensation is ultimately received. Permanent life insurance is typically the preferred funding option for these types of plans due to the fact that cash value inside the policy grows tax-free.

Life insurance purchased inside of an irrevocable life insurance trust (ILIT) may provide the necessary capital to pay estate taxes and provide liquidity outside the taxable estate for the benefit of heirs. Policy premiums may be funded with annual gifts in addition to lump sum gifts subject to gift tax exemption limits.

The years 2011 and 2012 bring with them many changes in the tax law and this will have an effect on most individuals and families. By utilizing tax-efficient investment portfolio construction and strategies, CPA firms that offer wealth management can help their clients ease the tax bite, but the time to act is now!

For more information about tax-optimized investment strategies and how you can integrate them into your practice, contact 1st Global at (800) 959-8461 or [email protected].


This Wealth Management article has been provided by 1st Global. With more than 500 firms affiliated with 1st Global, it is one of the largest wealth management services partners for the tax, accounting and legal professions. 1st Global delivers the required capabilities essential for wealth management excellence including progressive ongoing education, which places the firm in a unique position to offer wealth management knowledge.

1st Global was founded by CPAs on the belief that accounting, tax and estate planning firms are uniquely qualified to provide comprehensive wealth management services to their clients. Each affiliated firm is provided with education, technology, business-building framework and client solutions that make these firms leaders in their professions through dedicated professional client relationships built around wealth management.

1st Global Capital Corp. is a member of FINRA and SIPC and is headquartered at 8150 N. Central Expressway, Suite 500 in Dallas, Texas,(214) 265-1201. Additional information about 1st Global is available via the Internet at

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