Yet another strategy is the popular core-satellite strategy, mentioned earlier in the housing example. The SMA can be used to manage the taxable outcome of investment activity from other vehicles, such as real estate or mutual funds. This is particularly true in a multiple-discipline strategy with overlay management. SMAs can also be used as satellite investments with index investments, such as municipal bonds or ETFs, at the core. Again, the flexibility of SMAs can add significant value for advisors and their clients willing to explore the possibilities.
Another type of tax that is coming more and more into play in investors' portfolios is the alternative minimum tax. It was originally designed to keep wealthy investors from escaping tax liability completely through the tax shelters of the 1980s; the shelters have disappeared, leaving the AMT in their wake to affect more and more investors. The gradual effect of the AMT's disconnect with inflation over the years is bringing more and more investors under the AMT umbrella. As shown in the figure above, the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, predicts that by 2012 revenues generated from the AMT tax will surpass $180 billion. Tax optimization solutions for investors may be different from year to year in light of the AMT. A client may be subject to the tax in one year, yet not subject the next. It may be beneficial for investors to realize large gains or realize income in a specific year; in other years, it may be of greater benefit to carry losses forward to offset AMT liability in a future year. Because of the gradual increase in clients who are affected by the AMT, the nomenclature "AMT Creep" has come into being.
Advisors who become aware of the various types of tax liability and the situations under which that liability may be incurred, and who proactively manage it, will earn more of their fees, solidify client relationships, increase their stature and credibility with the tax professional community and position themselves as team leaders for the benefit of their clients.
