In the intricate world of wealth management and tax planning, every strategic move counts. Picture this: You’ve meticulously crafted a comprehensive estate plan to ensure the smooth transfer of assets to your heirs. However, both income and estate tax implications may threaten to erode the wealth your clients have worked tirelessly to build.

Along with that, as I’ve written about in the past, the non-tax and non-financial implications – such as the emotional aspects of wealth transfer and long-term care considerations – also loom large.

The good news is there are a number of tools at your disposal as a wealth manager to help clients navigate the estate and tax planning process and maximize their wealth transfer. One option that is gaining importance is the Separately Managed Account (SMA). SMAs stand out as a potent and now more-accessible tool in the arsenal for advisors and investors. SMAs provide a sophisticated solution that not only offers investment customization and flexibility but also plays a pivotal role in optimizing tax efficiency within estate planning.

In this article, Kirk Leslie and I delve into the nuances of SMAs, exploring how these tailored investment vehicles can bolster your wealth management strategy and fortify your estate planning endeavors. We’ll also explain how they can help safeguard and enhance investors’ financial legacies, while also enabling advisors to democratize high-level wealth management and tax-efficient investing for more of their clients.

The benefits of SMAs for estate planning

SMAs offer several benefits within the context of estate planning, making them an attractive option for individuals looking to manage their wealth effectively and ensure a smooth transition of assets to the next generation or intended beneficiaries.

Some of the key benefits include:

1. Direct ownership of securities: Unlike mutual funds or exchange-traded funds (ETFs), SMAs involve direct ownership of securities. This can offer several advantages in an estate planning context, such as the ability to make specific bequests of certain assets to designated beneficiaries or the ability to gift shares directly without having to liquidate positions, potentially reducing capital gains taxes.
2. Customization and flexibility: SMAs allow for a high degree of personalization in terms of investment choices and management strategies. This customization can be aligned with the specific goals, risk tolerance, and time horizon of the estate plan, ensuring that the investments are tailored to meet the estate’s needs.
3. Tax efficiency: SMAs can be managed in a way that takes into consideration the tax implications for the estate and the beneficiaries. For example, strategies such as tax-loss harvesting can be employed to offset gains and help minimize the tax burden. This is particularly beneficial in estate planning, where the goal is often to maximize the value passed on to heirs.
4. Transparency and control: SMAs provide a high level of transparency and control over the investments. Accountholders can see exactly which assets are held in the account and make informed decisions about the management of those assets. This can be particularly useful in estate planning, where it may be necessary to adjust strategies based on changing family dynamics or financial goals.
5. Ease of transfer: Assets held in SMAs can be easier to transfer to beneficiaries upon the death of the accountholder, especially if the account is set up with clear beneficiary designations. This can help avoid probate and simplify the process of distributing assets according to the estate plan.
6. Consolidated management: For individuals with significant wealth spread across various types of investments, SMAs offer a way to consolidate management under a single advisor or investment firm. This can be helpful from a tax standpoint by helping to avoid wash sale issues. More broadly, it can simplify the estate planning process and ensure a cohesive strategy across all assets.
7. Alignment with estate planning goals: SMAs can be tailored not just for financial return but also to align with the broader goals of the estate plan, such as philanthropy. For example, investments can be selected based on socially responsible criteria if that reflects the values of the estate.

The topic of wealth transfer is inherently difficult. It encompasses not only money – a taboo subject for many – but also death, family values, and interfamily relationships! Looking at the list above, ease and efficiency stand out as two key benefits of SMAs. Who wouldn’t want to be able to add some ease and efficiency when having to wade into the choppy and murky waters of wealth transfer?

This is not to say that employing SMAs will immediately solve all the issues that cause 70% of wealth transfers to fail.¹ But in our view, SMAs represent a sophisticated yet accessible tool for individuals and families seeking to fortify their wealth management and estate planning strategies.

By harnessing the benefits of customization, tax efficiency, and transparency, SMAs empower investors to navigate the complexities of wealth preservation and tax optimization with confidence and precision, helping to ensure a lasting legacy for generations to come.

¹ Williams, Roy and Preisser, Vic. “Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values.” Robert Reed Pub, 2010.

IMPORTANT INFORMATION

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.

Tax Efficiency is an attempt to minimize tax liability when given different financial decisions.