One fund, high tax efficiency, long horizon

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One fund, high tax efficiency, long horizen

by Offshore » Thu Jun 20, 2013 9:54 am

Hoping for recommendations for a highly tax efficient mutual fund. The question sounds much like a recent thread title: "If you must choose only one fund to hold, which would it be"? So, add to that "the fund should be extremely tax efficient."

Here's the situation. The fund will be held in an irrevocable trust. Any assets will not be (can not be) touched for 35-40 years, by stipulation of the trust. Since income inside a trust may be taxed at a very high rate (may exceed 39.6%) the investment vehicle should be highly tax efficient.

Please limit suggestions to Vanguard funds (preference). I have been thinking 100% domestic equities, something like Tax-Managed Capital Appreciation or Tax-Managed Growth and Income, but all options are on the table.

Offshore

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Re: One fund, high tax efficiency, long horizen

by dbr » Thu Jun 20, 2013 10:25 am

I would talk to a tax accountant and a lawyer familiar with the trust to evaluate all options. For example, distributing any taxable income may be allowed, and that transfers the tax cost from the trust to the beneficiaries.

Also, it is not a foregone conclusion that the assets need to be 100% stocks. Muni bonds are tax exempt, for example. In any case the tax tail should not wag the investment dog, although it is correct that trusts are taxed at higher cost than an individual would be in the same situation. A high risk portfolio may be appropriate, though that should be decided on the merits, including but not limited to the time line.

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Re: One fund, high tax efficiency, long horizen

by G-Money » Thu Jun 20, 2013 10:34 am

Agree with dbr. Also, not clear why only one fund can be used. Even if the tax cost of rebalancing was prohibitive, it might be prudent to have more than one fund/asset class.

Don't assume I know what I'm talking about.

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Re: One fund, high tax efficiency, long horizen

by z3r0c00l » Thu Jun 20, 2013 10:40 am

VTWSX? Not especially tax efficient but not bad. If I had to pick one fund, I would want that with the whole market.

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Re: One fund, high tax efficiency, long horizen

by KyleAAA » Thu Jun 20, 2013 10:44 am

IF I was limited to only one fund, I would probably still go with the Lifestrategy Growth fund regardless of tax consequences. It's not clear how large this trust would be, anyway. Could you legitimately expect the annual income to exceed $10k or wherever it is the highest bracket starts for trusts? I would greatly prefer to go with a three-fund portfolio with the bond portion in the intermediate-term muni bond fund, though.

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Re: One fund, high tax efficiency, long horizen

by Offshore » Thu Jun 20, 2013 1:57 pm

dbr- smart points. Appreciated. 

KyleAAA- I like the concept of the LifeStrategy Funds and the Target Date funds. How does one evaluate these products as to their tax efficiency?

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Re: One fund, high tax efficiency, long horizen

by Quidnam » Thu Jun 20, 2013 2:13 pm

If it has to be in one fund, I would go with VTMFX (Tax-Managed Balanced Fund). The bond portion is in munis.

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