CHAPTER 11

TAXES

Pay tax on your take, not what you make.

—Warren Buffett

Jean Brunel, a leading authority on wealth management issues, says that “The impact of taxes . . . mandate[s] a new investment solution” that focuses on after-tax wealth accumulation rather than periodic returns.1 Taxes are an expense that creates a drag on wealth accumulation and are therefore worthy of significant attention from wealth managers. However, a number of myths concerning taxes and investments are endemic to modern investment planning. If wealth managers are to provide competent guidance for clients they must eliminate myth-based planning from their repertoires.

This chapter addresses these important issues and presents some strategies to deal with the impact of taxes. Because of the controversial nature of many of these concepts and the ever-changing tax environment, we have included a significant amount of reference material.

TAX REDUCTION VERSUS WEALTH ACCUMULATION

There are a number of issues important to clients’ understanding regarding their personal tax constraints, but none is more commonly misunderstood or a source of more bad advice than the myth of tax reduction. The single most common piece of investment advice provided to clients by non–investment professionals is that they should reduce their taxes. Not only is this the most common advice, but it also competes for the title of the dumbest advice. For a wealth manager, clearly the issue is to maximize the after-tax wealth accumulation, ...

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