Businesswomen analyzing investment charts in meeting room

 

When it comes to investing, asset allocation is very important. This is the percentage of total investments that are allocated to different investment areas; the most common include stocks, bonds, and cash. It is crucial to diversify your investment portfolio so you’re not taking on unnecessary risk, but, for wealthy investors, it is also extremely important to consider where those different investments are put to maximize after-tax growth. Here is why asset location can potentially help you supercharge your investment, and why Peter Culver believes it may be more important than asset allocation when determining an investment strategy.

 

When It Comes to Taxes, It’s All About Location

 

Peter Culver often presents this simple example when discussing asset location: An investor with $2 million in investment puts $1 million in a personal account and $1 million in an IRA. The two are very different when it comes to taxation: personal accounts are subject to taxes on bond interest and stock dividends as well as capital taxes on any sales of the stocks and bonds. There are no taxes on the investments in an IRA account during pre-distribution.

 

Given asset allocation, an investor will have a percentage of his or her money in stocks and bonds. Now there are two types of bonds that can be purchased: government/corporate bonds and municipal bonds. Government and corporate bonds pay a higher rate of interest, but the interest is taxable. Municipal bonds are not subject to taxes, but they typically pay a lower rate of interest.

 

In order to take advantage of the benefits of both types of bonds, an investor will need to consider asset location. By putting those government and corporate bonds in a tax-free account like an IRA, he or she will be able to bypass paying taxes on the interest generated. At the same time, although a personal account is taxable, municipal bonds are not, which make it a good location to put this type of investment. By putting investments in the best location, investors can significantly increase their after-tax return.

 

 

 

 

You’ve worked hard your whole life to build your wealth and maintain it over time. Eventually, it will be time to leave it to your children. But are your children prepared for inheritance?

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One of the most difficult parts of passing wealth is ensuring heirs are ready. In most families, 70% of inherited wealth is lost by the second generation, and 90% by the third. Poor money management and bad investments are only a few of the causes. While these numbers are staggering, they reinforce the vital importance of ensuring your children are prepared to handle the inherited wealth.

Educate Your Children
Just as you are responsible for managing your wealth, you are also responsible for teaching your children how to manage it. Wealth and investment strategist Peter Culver offers useful tips:

1. Have Multiple Conversations
Speaking with your children about the family wealth is not a one-time conversation. It’s a continual dialogue that should take place over the years as your children get older. Inform them of the family’s wealth, your values and what’s important to your family, and their responsibilities in managing it.

2. Teach the Value of Money
Parents may feel conflicted in passing their wealth down to their heirs. While they want their children to benefit from the family wealth, they also want to ensure their children are independent. Tell your children what you want your wealth to accomplish for the family and model the financial behavior you want your children to follow.

3. Hold Family Meetings
The key to successfully transferring wealth is communication. While it can be difficult to talk finances with family, it is necessary. Family meetings will help ensure that everyone is on the same page as to what happens to the money over time.

4. Create a Mission Statement
This is a useful tool for defining the wealth and determining how it will be used. To help your children and future generations understand and appreciate how the wealth was built, include in the mission statement how family values contributed to the creation of the wealth.