CAPITAL IDEAS: How the rich legally avoid taxes (and how you can, too)

Becoming (and staying) rich is not just about how much your investment portfolio grows (or declines). You also need to safeguard your assets against overpayment to the Internal Revenue Service (IRS).

Part of the “keep what you have” equation involves getting out of the market when things are going poorly. The less-discussed component is avoiding taxes. It is not that we don’t think about it, but it is not addressed as much as it should be, probably because it is difficult to implement, let alone explain. Also, maybe the rich just want to keep their tricks to themselves! Let’s spill the tea on their tax-avoidance strategies.

For high-net-worth investors, thoughtful tax planning can contribute more to long-term wealth creation and protection than simply wringing out another percentage point of pre-tax return. The game is nont “evasion”; it is using the rules as written to defer, reduce, or re-characterize taxes so more of your money compounds for you instead of for the IRS.

1. Characterization of gains. Short-term capital gains (assets held for less than one year) are taxed at ordinary income rates, which can be as high as 37 percent (and that is just the federal level!). Long-term gains (assets held more than one year) get preferential rates (from zero percent to 20 percent, depending on your income). Additionally, a long-term gain can escape the 3.8 percent Medicare surtax (Net Investment Income Tax) if your net investment income is managed carefully.
2. Tax-loss harvesting remains a core tool. Realize losses to offset realized gains today or bank excess losses for tomorrow, and keep your asset allocation intact by swapping into similar (but not “substantially identical”) exposure to avoid the wash-sale rule. Done systematically, especially in volatile markets, this turns drawdowns into future tax assets.
3. Put the right assets in the right buckets (asset location). You likely have three “tax buckets”:

• • Taxable (brokerage, joint, trust): Best for tax-efficient assets such as ETFs, individual growth stocks you intend to hold, and municipal bonds (when your marginal rate warrants it).
  • Tax-deferred (traditional IRA/401(k)): Stash tax-inefficient income investments like high-yield bonds, REITs, actively traded strategies here, where compounding is not annually taxed.
  • Tax-free (Roth): Reserve for your highest-expected-return holdings here (e.g., pre-IPO stocks you have direct access to) so gains can grow and be distributed tax-free later.

A relocation of assets can increase your after-tax return without altering your investment strategy.

4. ETFs are designed to be more tax efficient than mutual funds. Mutual funds commonly distribute capital gains when managers trade securities or when other shareholders redeem their shares. By contrast, most ETFs rely on in-kind creation and redemption with authorized participants. Under Internal Revenue Code §852(b)(6), ETFs can shed low-basis positions in kind without recognizing a taxable gain, which helps ETFs minimize or avoid capital-gains distributions to shareholders. Translation: You retain control over when you realize gains (when you sell), rather than inheriting everyone else’s trades as taxable distributions.

Not all ETFs are equally tax efficient, and interest and non-qualified dividends are still taxable annually. But if you want broad exposure with fewer surprise distributions, ETFs are generally tax friendly.

5. Use charity to lower taxes today and shape your legacy. For the charitably inclined, philanthropy is one of the cleanest ways to reduce tax friction.

• • Donate appreciated securities (not cash): You get a deduction at fair-market value and sidestep the embedded capital gain.
  • Donor-Advised Funds (DAFs): Front-load multiple years of giving into a single high-income year, take the deduction now, and grant to charities over time.
  • Qualified Charitable Distributions (QCDs) from IRAs can satisfy required minimum distributions without raising your income, and often reducing NIIT exposure, IRMAA surcharges, and taxation of Social Security.

6. Shift income.

• • Family income shifting: Employing family members in a bona fide business (with reasonable wages for real work) or gifting income-producing assets within annual/lifetime limits can help move income into lower tax brackets.
  • Estate planning matters: Many New York residents are moving to Great Barrington and the surrounding areas. If you are a New Yorker moving to the Berkshires and if your assets exceed $2 million, you will want to understand the Massachusetts estate tax exemption.
  • Entity and trust design: Grantor-trust structures, family limited partnerships, and SLATs (spousal lifetime access trusts) can help align income and control with your planning goals.

7. “Buy, borrow, die.” You have read the headlines: Ultra-wealthy families buy appreciating assets, borrow against them to fund their lifestyle or invest more (loans are not income), and let heirs inherit the asset with a step-up in basis at death, potentially wiping out lifetime capital gains. Properly structured, this is legal and powerful because the interest can be tax deductible.
8. Know when to pay taxes on purpose. Sometimes, the most tax-efficient move is to realize gains or income intentionally.

• Managing the calendar: Staging sales over multiple tax years could reduce your total tax obligations.
• Bracket management: Retiring mid-year? Selling a company next year? Pull forward some gains this year to take advantage of a temporarily lower bracket.
• Roth conversions during market crashes: Convert IRAs to a Roth during market drawdowns (or low-income years) to lock in future tax-free growth and reduce future RMDs.

Bonus tip: If you live in Massachusetts, California, Connecticut, Maine, New Jersey, New York, or Washington, D.C., consider relocating outside of the state or district before selling your business. The so-called “millionaires’ tax” in those regions is a killer. Thoughtful tax design can be nearly as important as investment selection.

What new investment is Berkshire Money Management buying?

Recently, for my own portfolio and for the most aggressive investors at BMM, I bought a new exchange-traded fund. I bought the Fundstrat Granny Shots U.S. Large Cap ETF (symbol: GRNY). In this video, Tom Lee of Fundstrat explains the investment methodology of GRNY.

Alternatively, if you prefer to skim the methodology, the following is a modified summary from Scott Little. I hope you find it helpful in learning more about how I am positioning my portfolios.

The Granny Shots investment is an actively managed ETF, which means the fund managers make deliberate stock selections rather than tracking an index. It invests in U.S. large-cap companies, aiming primarily for long-term growth through capital appreciation.

The name “Granny Shots” is a nod to an unconventional basketball free-throw technique that, statistically, has a higher probability of scoring than conventional shots. The name symbolizes the fund’s unique, disciplined investment process, designed to be reliable and results-driven, even if it doesn’t look flashy.

How the strategy works:

• Top-Down, Thematic Insight. The team, led by Tom Lee, begins with big-picture themes, such as shifts in monetary policy, technological waves like AI, demographic forces, and where the economy is headed.
• Quantitative Filtering, Bottom-up (as opposed to “Top-down,” which is a macroeconomics-first approach to investment selection). With themes in mind, a quantitative model screens large-cap stocks to find those that best align with these themes. Only stocks that show up in at least two of the identified themes are considered for inclusion.
• Focused Portfolio. The fund holds approximately 20 to 50 large-cap U.S. equities, which are equally weighted to maintain diversification.
• Long-Term Growth. The ultimate goal is steady capital appreciation over time, guided by discipline and research, not fads or gut feelings.

Why own it?

• Active, data-driven management that blends innovative macro/theme thinking with disciplined stock selection.
• Concentrated yet diversified and grounded in compelling themes.
• Transparent and rules-based.

Think of the Granny Shots ETF as a selectively managed portfolio of large U.S. companies built around long-term themes.

Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $1 billion of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representation that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com. Adviser is not licensed to provide and does not provide legal, tax, or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.