When it comes to investing, the wealthy are intensely concerned about fees and after-tax investment returns. They want to avoid situations where they achieve a significant investment return only to lose a substantial portion of the upside to taxes and other expenses.

In today’s environment, high-income earners are dealing with top tax rates of 39.6% for income taxes, 20% for long-term capital gains taxes and 3.8% for the net investment income tax (NII, also called the Obamacare tax). On top of that, many people have to pay income taxes to their states and, in some cases, their cities.

Of course, paying more in taxes on an investment portfolio that has meaningfully appreciated is a “high-class problem” that many investors would be happy to have. That said, there are a number of ways for investment professionals to flexibly manage investments and still mitigate taxes, thereby delivering potentially superior results.

One way to achieve this is through a custom private placement annuity.

These are annuities that essentially incorporate the investment philosophy and approach of a registered investment advisor. It has the characteristics of a deferred annuity, but the underlying portfolio is managed by the investment professional who set it up.

A Case Study
Let’s look at one example of how an advisor used a private placement annuity for a wealthy client. In this case, the advisor has a client with $30 million in liquid assets looking to take advantage of compounding by leveraging tax deferrals.

Turning to private placement annuities, the advisor projected the performance of a custom annuity versus a taxable discretionary account for the 50-year-old male client (Figure 1). On an initial investment of $10 million, at five years the annuity outperforms the discretionary portfolio by slightly more than $1 million. With the power of compounding, the difference is about $3 million after 10 years, nearly $10 million after 20 years and more than $20 million after 30 years. If the wealthy client lives past age 90, as his grandmother did, the difference approaches $50 million.