Over at Bogleheads we came across the following discussion:
Vanguard Fund w/ Tax-Efficiency
by Patriot1997 » Fri Aug 29, 2014 3:20 pm
Hello-I currently have an account (solely in my name) that is made up of funds that I am holding for an older relative. This is not a trust or anything similar. It is simply a taxable account in my name with the moral understanding that these funds are to be utilized (if/when needed) to support my relative. The expectation is that these funds would not need to be touched or utilized for at least 5-7 years.
I am looking to move this account (valued at approx $100,000) to Vanguard. Could you recommend a Vanguard fund/strategy that would be conservative to moderate in risk and also tax-efficient? Depending on the year, I am usually in the 28% or 33% percent tax bracket. So I am seeking to avoid annual taxable earnings in my name to the extent possible. I have been looking at the LifeStrategy Funds but I am not sure those meet my goal of tax-efficiency. But I like the set it and forget appeal of LifeStrategy. Thank you.
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Re: Vanguard Fund w/ Tax-Efficiency
by livesoft » Fri Aug 29, 2014 3:26 pm
You will not avoid taxes, but you can minimize them. If you look at the LifeStrategy fund and see what it holds, you can hold those funds separately, but instead of the bond funds, choose a different bond fund, namely one that is tax-exempt. It's a pretty simple solution.
Or you can pick the tax-managed balanced fund and buy on the side the Total Int'l Stock Market Index fund.
Expect to pay about 0.3% x 0.6 x $100,000 in taxes on the dividends every year. That would be about $200 more in taxes every year.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Vanguard Fund w/ Tax-Efficiency
by Lafder » Fri Aug 29, 2014 3:36 pm
Before I found Bogleheads, I used this fund because it's name of "Tax Managed Balanced Fund." It may be what you want. (I now use more of a 4 fund portfolio for myself)
With a smaller gift of $, closer to 10k that my kids were given by a relative for high school graduation (7 and 10 years out) I did go with the simplicity of Life Strategy Moderate Growth. But I also plan to match any losses if that were the case by the time it was for my kids. (My kids have no awareness where the $ is, they just know their relative gave them travel money that will be there when they graduate HS). It is in my name.
You will likely get better tax advantaged answers than I can give : ), I think the bigger issue for me for an older relative's $ would be protecting the capital, depending on how many other resources your relative has access to.
You will probably get all kinds of comments about the $ being in your name.
Hope that helps,
lafder
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Re: Vanguard Fund w/ Tax-Efficiency
by grabiner » Fri Aug 29, 2014 6:22 pm
Lafder wrote:Before I found Bogleheads, I used this fund because it's name of "Tax Managed Balanced Fund." It may be what you want. (I now use more of a 4 fund portfolio for myself)
Normally, I don't like the Tax-Managed Balanced Fund, because it locks you into its allocation; I would prefer holding separate stock index and municipal-bond funds. However, for the original poster, it may make sense, as he wants to maintain a moderate allocation, and will be spending the stocks and bonds simultaneously as they are needed. In addition, this is a fixed-size portfolio and will need to be rebalanced; the fund does this automatically, while if he holds separate stock and bond funds and has no inflows. there will be a tax cost for rebalancing by selling stock after the stock market rises.
An alternative, if preservation of capital is more important, would be to put the whole thing in Long-Term Tax-Exempt (or a long-term fund for your state if Vanguard has one). This would be easier to absorb into your portfolio if it turns out that the money is not needed by the relative.
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Re: Vanguard Fund w/ Tax-Efficiency
by retiredjg » Fri Aug 29, 2014 6:27 pm
I'll vote for Tax Managed Balanced Fund combined with a tax-exempt bond fund if needed to bring the stock to bond ratio down to what you want.
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Re: Vanguard Fund w/ Tax-Efficiency
by livesoft » Fri Aug 29, 2014 6:43 pm
retiredjg wrote:I'll vote for Tax Managed Balanced Fund combined with a tax-exempt bond fund if needed to bring the stock to bond ratio down to what you want.
Or a total market index fund to bring the stock to bond ratio up to what you want. 
One would hope that one would not need 3 funds (total US, total int'l, tax-exempt bond) to get things where one wants them if one used the tax-managed balanced fund. 
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Vanguard Fund w/ Tax-Efficiency
by retiredjg » Fri Aug 29, 2014 8:45 pm
livesoft wrote:
retiredjg wrote:I'll vote for Tax Managed Balanced Fund combined with a tax-exempt bond fund if needed to bring the stock to bond ratio down to what you want.
Or a total market index fund to bring the stock to bond ratio up to what you want. 
Agreed. I just assumed the relative is older and that 50/50 would be the max aggressiveness wanted. But that may not be correct.
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Re: Vanguard Fund w/ Tax-Efficiency
by pkcrafter » Fri Aug 29, 2014 9:30 pm
Is this your money, or money the relative has asked you to manage? If it's the relative's money, how old is he/she and what is his/her risk tolerance? Will t his money actually be needed at a certain time?
Paul
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Re: Vanguard Fund w/ Tax-Efficiency
by Anon1234 » Fri Aug 29, 2014 11:55 pm
The relative is likely in a lower tax bracket. You might consider moving the funds back under the relative's name and be an authorized agent/rep to control the investments (I forget if agent is the right term). You can gift $14,000 this year. You could also do an interest free loan for the full amount and put it all in their name this year, then forgive $14,000 each year until the loan is fully forgiven. And you can put a forgiven upon death clause, or due in full upon death clause, whatever makes sense for your situation.
Possibly you are hiding this money from spend down in which case you can ignore my whole post.
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