Model Portfolio & SMA Strategists Showcase - Flipbook - Page 33
SMAs & MODEL PORTFOLIOS
Worth understanding operationally,
these exclusions and restrictions don’t
get communicated to a manager
through a phone call or an email.
Most platforms capture them through
structured, portfolio-level questionnaire
technology built directly into the
onboarding workflow. An advisor
or client answers a defined set of
questions about sector exclusions,
company-specific restrictions,
and values preferences, and that
questionnaire output feeds directly
into the account’s trading rules going
forward. This matters for due diligence.
A platform with mature questionnaire
technology can apply and maintain
restrictions automatically and
consistently across rebalancing
events, while a platform without it may
require the advisor to manually flag
and re-confirm restrictions every time
the account trades, which is exactly
the kind of manual process that
quietly breaks down over a long client
relationship.
GIFTING APPRECIATED
SECURITIES IN KIND
Direct ownership enables a specific
charitable and estate-planning
technique that a fund can’t replicate:
gifting individual appreciated securities
directly out of the account, rather
than selling them and gifting cash.
When a client donates an appreciated
stock directly, whether to a charity, a
donor-advised fund, or in some cases
a family member, the client avoids
realizing the capital gain entirely, and
the recipient receives the security with
its existing cost basis intact, to do with
as they choose.
A charity, being tax-exempt, can
typically sell the position without
triggering any tax at all, meaning the
appreciated gain effectively disappears
from the tax picture rather than merely
being deferred.
A client in a directindexed SMA can
identify the single most
appreciated position
in the account and
gift precisely that one,
leaving the rest of the
portfolio untouched.
This only works cleanly when the
client owns the actual security, which
is exactly the structural advantage
direct indexing and SMAs provide
over a fund. A client holding an S&P
500 index fund has no way to gift “the
appreciated technology stocks inside
the fund” specifically. They can only gift
or sell shares of the fund itself, which
carries its own blended cost basis.
A client in a direct-indexed SMA can
identify the single most appreciated
position in the account and gift
precisely that one, leaving the rest of
the portfolio untouched.
This is a genuinely underused
technique relative to how well it fits
the profile of exactly the tax-sensitive,
philanthropically inclined client
this chapter has been describing
throughout, and it’s worth advisors
raising proactively rather than waiting
for a client to ask about charitable
giving strategy separately.
The vehicle receiving the gift changes
the outcome enough to deserve
its own mention. A donor-advised
fund gives a client an immediate
tax deduction while letting them
recommend grants to specific charities
over time, which is often the simplest
fit for a direct-indexed account’s
most appreciated single positions.
A charitable remainder trust works
differently and suits a different situation.
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The client (or another named
beneficiary) receives an income stream
from the trust for a set period or for
life, with the remainder passing to
charity afterward, a structure worth
considering when a client wants
to divest a concentrated position,
generate lifetime income from it, and
support a charitable cause, all in one
transaction, rather than simply give the
position away outright.
For clients past 70½ drawing required
distributions from an IRA, a qualified
charitable distribution lets the client
direct that distribution straight to a
charity, satisfying the distribution
requirement without the distribution ever
counting as taxable income in the first
place. This mechanism is worth flagging
specifically because it’s frequently
overlooked relative to how directly it
applies to exactly the retirement-income
clients discussed in the decumulation
section later in this guide (p. 38).
WHAT COST-BASIS STEP-UP
MEANS FOR A LIFETIME OF
CAREFUL HARVESTING
Everything in this chapter so far
describes managing gains and losses
during a client’s lifetime. It’s worth
being direct about what happens to
all of that careful tax management at
death, because the answer changes
the calculus for how aggressively a
strategy should be managed for an
older client in the first place.
Under current tax law, a security held
until death generally receives a stepup in cost basis to its fair market value
on the date of death, meaning an heir
who inherits the position and sells it
immediately owes little or no capital
gains tax, regardless of how much the
position appreciated during the original
owner’s lifetime.
This has a real, sometimes
counterintuitive implication for the
