Some Smart Tax-Efficient Investment Strategies to Consider

• Typical taxpayers have fewer options for tax-saving moves compared to high-net-worth investors.
• Some alternative versions of the input sentence are: 1. Private placement life insurance, private real estate investment trusts, and charitable remainder trusts are all options for investors looking to diversify their portfolios. 2. Private placement life insurance, private real estate investment trusts, and charitable remainder trusts are all investment vehicles that offer unique benefits and risks. 3. Private placement life insurance, private real estate investment trusts, and charitable remainder trusts are all types of investment vehicles that require careful consideration before investing. 4. Private placement life insurance, private real estate investment trusts, and charitable remainder trusts are all investment options that can provide tax benefits and diversification in a portfolio. 5. Private placement life insurance, private real estate investment trusts, and charitable remainder trusts are all investment vehicles that require a thorough understanding of their terms and conditions before investing.
• Here’s a look at the pros and cons of each.

It is usually past the deadline to lower one's tax bill for the previous year when the clock strikes midnight on Jan. 1.

Tax season prompts individuals to consider ways to minimize their tax obligations to the IRS.

While not yielding immediate substantial savings, utilizing a 401(k) plan, health-care savings account, or 529 college savings plan can result in significant savings over time for most investors.

High-net-worth investors have more lucrative options, but they are not suitable for 2021 taxes. Let's examine some of them and discuss their advantages and disadvantages.

Private placement life insurance

Investors can hold a range of actively managed, high-growth investments within an insurance policy, thereby avoiding federal and state taxes on the policy's cash value.

Anyone with investments that generate frequent income distributions, such as hedge funds, would greatly benefit from this scenario. The theoretical benefits are most significant for investors residing in high-tax jurisdictions, such as California, New Jersey, or New York, where the aggregate tax rates on investment income can approach 50%.

The minimum investment for private placement life insurance is substantial, with annual premiums often costing as much as seven figures over the policy's duration.

The strategy will be profitable only if the annual premiums are significantly lower than the tax burden outside the structure, which requires predicting future investment returns, a task that is full of uncertainty.

Private real estate investment trusts

REITs are investment portfolios comprising various real estate assets, often in a single industry or region. By doing so, REIT companies can take advantage of economic trends in specific areas, such as the ongoing boom in multi-family properties in the Sun Belt.

Private REITs offer a significant advantage in the form of tax-free cash distributions, which are often larger than those offered by non-traded or publicly traded REITs. This is due to the lower compliance costs associated with private REITs, which enables them to provide more generous distributions to investors.

Private REITs have lower compliance costs because they are not subject to Security and Exchange Commission registration requirements. However, this also makes them less attractive to some investors. Additionally, private REITs are illiquid, with lockup periods ranging from seven to 10 years, and annual fees typically fall between 1% and 2%.

To purchase a private real estate investment trust (PPLI), you must be an accredited investor. However, the cost of PPLI policies is not as high as it used to be for individuals.

More than 13 million Americans meet the standard of having an income of over $200,000 ($300,000 for couples) or a net worth of $1 million or more in the past two years, according to one estimate.

Charitable remainder trust

This is a great way for charitably inclined individuals to reduce the tax impact on highly appreciated assets.

An irrevocable trust is established by a donor, who names a qualified charity as the beneficiary and sets up the trust to generate income for themselves or someone else, for a specified period of time, based on their income requirements.

The donor can deduct up to 30% of their adjusted gross income for securities and 60% for cash when funding a trust, and they can also carry forward any unused deduction for up to five years.

By deferring taxes on assets within a trust until retirement, the donor can potentially collect more income at a lower tax rate.

No matter how wealthy someone is, there are always opportunities and obstacles to any tax strategy. It is crucial to have access to a professional who understands the complexities of the options available. One mistake could result in significant financial consequences.

— By Andrew Graham, founder and managing partner of Jackson Square Capital