280 | Maximize Gains and Minimize Taxes: Introducing Ultra Tax Efficient Wealth Management℠,Part One

[INTERVIEW]

[00:00:00] Hilary Hendershott: Well, hey there, Money Lover. I’m here again with my husband, Robert. And the last time Robert was on the show, it was because he is my husband, and we were celebrating my firm’s 10-year anniversary, and we were talking about how he and I were approaching his impending retirement as a couple. So, that was great. We got a lot of great feedback on that episode. Thank you if you’re one of the folks who wrote in to say how much you enjoyed that episode. And he’s back. And the irony is not lost on me that he’s back behind the mic with me today, and we’re talking about something completely different. He’s still my husband, and technically he’s not retired anymore. So, let’s talk about why that would be. He put his retirement on hold to join us, my firm, as Hendershott Wealth Management’s new Chief Investment Officer. So, that was a quick retirement, and that’s because of the opportunity that we’re going to talk about today. I’m really excited about it.

[00:00:59] Robert closed his hedge fund last year after having spent more than two decades working as a chief investment officer and finance professor. So, it really was serendipity that his technical chops were available when I came across this opportunity. I mean, it’s just like amazing. He and I got so excited about it that we decided, as a couple, to bring him out of retirement to help you be able to take advantage of this. So, listen up, and I’m going to start at the beginning.

[00:01:34] So, last October, I found myself at a conference of financial advisors, and I was approached by someone at the gathering, the cocktail party, a female employee of a large investment firm that I’ve known about for a long time. She said, “Hey, you should come to our breakout tomorrow.” And I said, “Okay.” I mean, I chatted with her for a couple of minutes about what the breakout was going to be about, but I sat in this room, and about four or five minutes into this talk, which was an hour-long talk, I kind of put my pencil down and stopped writing. I mean, I don’t think I actually had a pencil. I was probably typing on my laptop, but I just stopped typing and kind of stared at the speaker. And he’s talking about something about this–you could call it a tax management strategy–but again, that’s even an inefficient term to describe it.

[00:02:27] Robert and I are going to talk about it in full in this episode, but I actually had butterflies in my stomach. I got so excited about it, and yet, in the back of my mind, I couldn’t help but think, “It can’t really be this good.” And so, I just listened. And at the end of the breakout session, I asked a couple of questions, but I forwarded all of the paperwork–the PDF downloads that they give you at a conference that a speaker provides–to my husband and I said, “You got to tell me if this is real.” Enter Robert.

[00:03:06] Robert Hendershott: Well, it was an odd moment because I had been home with our daughter and not really focused on work at all when Hilary sent me these documents. I know the firm, I actually worked with some people who worked with one of the founders, and it was too good to be true. I had the same feeling that I had when I first heard about the Act 60 in Puerto Rico; back then the Act 2022. And back then, there were lots of people who were shilling things that were related to it but actually weren’t abiding by the letter of the acts. And I figured this is the same thing. They couldn’t really have the kind of benefits that it looked at first that it did, but it turned out that what they were doing was very much like what I had been doing for 20 years, but 180 degrees.

[00:04:18] And as soon as I changed my perspective and I looked at what was possible, if instead of focusing on returns you were focused on taxes, and that doesn’t mean you’re ignoring returns, how powerful this could be? And I got really excited about it because it’s something that is predictable, it’s quantifiable. And I don’t know if your listeners know how rare that is in the world of investments. Yes, we know the market tends to go up, but none of us have any idea whether it’s going to go up tomorrow or next week or next month. This is something that we could actually look forward and quantify the value of it in a very reliable, if not completely precise, sense. So, I got very excited, and I came back to Hilary and said, “You should absolutely be doing this.”

[00:05:06] Hilary Hendershott: Yeah. So, it took me a couple of days to get home from that conference. It was in Florida. And by the time I walked in the door, he said to me, “You should stop everything else that you’re doing and do this.” So, that was October. As I record this, it’s March 12, 2025, so it’s about six months later because good things take time. Wait. Is that five months? It’s five months. And at this point, we’ve created a suite of services to wrap around this offering that we’re going to talk about today. We’re calling that suite of services Ultra Tax Efficient Wealth Management^SM.

[00:05:40] And, like I said, we brought Robert out of retirement, and we are ready to offer this to suitable investors, and we’ll define that as well. But if you know someone who has capital gains in their life, listen to this episode and forward it to them. So, let’s get into it. Again, we call this suite of services Ultra Tax Efficient Wealth Management^SM. And before we get into the details about that, let’s talk about the general benefits of tax deferral.

[00:06:28] So, I think most people know intuitively that when they find out if they’re going to sell their million-dollar home, that’s mostly in a gain position. Say you bought it 35 years ago, you’re going to owe a quarter million dollars in taxes, right? The gut reaction, the knee-jerk reaction is, “Okay, then we’re not going to sell,” and that’s actually probably a good decision. I mean, depending on like sometimes you need to sell, but I’m not sure if you think about the bigger picture there. Because by not selling, you’re actually implementing a strategy called tax deferral, and tax deferral is a really valuable strategy.

[00:07:02] So, by not selling, you get to keep the quarter million dollars, which is part of that million-dollar home, and the value of that home keeps growing. But if you put the two scenarios right next to each other, let’s say your million-dollar home is actually right next door to the life that you would have if you sold the million-dollar home and paid the tax, and that would be a $750,000 home. If there are no other variables here, those two homes are going to be growing at the same growth rate. Let’s say it’s 4% per year, but 4% of $750,000 is $30,000 and 4% of a million dollars is, of course, $40,000. So, tax deferral allows you, in this case, $10,000 of free money every year. And of course, that number compounds on itself.

[00:07:51] Robert Hendershott: And compound returns are the foundation of successful investing. The thing about tax deferral is that you get to earn compound returns on the money you would have paid in taxes. So, that free money is earning more free money, which means, in the end, you end up with a lot more money than you would have had when you can defer paying taxes than if you have to pay taxes on your investment income every year. And if you defer long enough, it’s closer to paying zero taxes than it would be to paying the taxes that would be due every year.

[00:08:26] Hilary Hendershott: But let’s say you’re talking about an investment that you don’t live in, like a concentrated stock, perpetual tax deferral doesn’t let you spend your earnings. Eventually, you have to pay the taxes if you want to spend your money. And that’s how, for example, retirement accounts function.

[00:08:44] So, you know about IRAs and 401(k)s. Those offer tax deferral for wage income during your working years, and over time, you do get compound returns. And the whole system where, if you’re smart, you end up really wanting to maximize your tax deferral every year while you’re working and you’re penalized for withdrawing early really encourages discipline.

[00:09:08] Robert Hendershott: And what we’re talking about today, the fact that capital gains are only taxed when they are realized, is an opportunity to get that same tax deferral on your other savings.

[00:09:22] Hilary Hendershott: Exactly, exactly. But it has this dark side. The investments are largely frozen because if you sell them, you lose the tax deferral. And this isn’t a big problem when investments are really diversified, for example, index funds. You can usually just let those ride, although if you’re holding more than one index fund, they can get out of balance. But it’s a real issue when investments are concentrated. For example, when people own a bunch of their company’s stock, which I talked about in Episode 277, and in that case, there are really big benefits to diversifying a concentrated portfolio, but it’s expensive to pay the associated tax and give up the tax deferral.

[00:10:34] So, in our role as financial advisors, wealth managers with clients, part of the way we deal with the challenge of updating portfolios and keeping them balanced and diversified, and it’s also a way to create a silver lining to declining stock prices, is we implement tax loss harvesting whenever we can to offset realized gains.

[00:11:13] Robert Hendershott: And tax loss harvesting is a great strategy because it creates losses that can be used to offset gains. So, you can take gains without having to pay taxes since the losses and gains cancel out. But in good market years, there aren’t very many losses to harvest. Your investments are mostly up, and you need losses to get those offsetting tax benefits. So, that ties your hands when you’re trying to diversify or rebalance portfolios unless you’re willing to incur capital gains.

[00:11:44] So, we’re solving that problem with Ultra Tax Efficient Wealth Management^SM. It is a strategy that reliably and predictably realizes losses to offset capital gains elsewhere in the portfolio without sacrificing significant upside or adding meaningful risks. So, you get these big benefits and the costs are very moderate. And I know why this might sound too good to be true because that’s how we were first thinking about it. Hilary, I can see how it triggered your investment BS sensors when you were first sitting in that breakout session. But it’s real, and when you work it through, you work the math through, it makes a lot of sense.

[00:12:22] Hilary Hendershott: Yeah, I really am very suspicious of alternative investments. I haven’t talked much about that on the podcast up to now. I guess I sort of hoped they would go away or that my listeners wouldn’t hear about them much. But because, for some reason, they continue to be popular, I am going to do an episode on that in the coming months. Robert, though for now, would you please explain to our lovely listeners how you and I know that this particular strategy is real and that it works?

[00:12:52] Robert Hendershott: Well, it’s because it has a long-short component. Now, if you’re listening to this and you start to tune me out when I say “long-short component” because it sounds technical and most people don’t know anything about this, just give us a few minutes because this is a conversation that could really alter your financial trajectory for the much, much better. So, I want to explain it briefly, but it’s not the details of long and short. Someone else is going to worry about that for you. It’s the high-level concepts.

[00:13:27] So, short is where you borrow stocks from someone else and you sell them today. Now, you owe these stocks to someone else. You’re going to need to buy them back and replace them, give them back to the original owners at some point in the future. So, in essence, shorting a stock is betting that it’ll go down. You make money if you can buy that stock back in the future at a lower price, and you lose money if you buy that stock back in the future at a higher price.

[00:13:57] Now, these short positions are the primary source of reliable losses in the strategy because short positions tend to lose money. Remember, stocks go up over time on average–so we don’t know if the stock market is going to go up or down tomorrow or next week or even next month–but if we look out the next year, it’s likely to go up the next 10 years, it’s very likely to go up the next 50 years, it’s incredibly likely to go up… These long-term trends mean that short positions tend to be losers. But we don’t just take on those short positions.

[00:14:33] We also buy offsetting long positions, that’s buying stocks or ETFs or something that will balance out the short position. And that combination, the short positions and the long positions, that creates a portfolio that’s what we call market neutral because it’s neutral to what the market does. In theory, the paired long and shorts earn a zero return whether stocks go up or down because when stocks go up, the longs tend to be profitable and the shorts tend to lose money. When stocks go down, it’s the other way around. Now, of course, you can design this in a way where you try and make money, and that’s what the entire hedge fund industry does, where you are buying stocks that you think will go up more than the shorts that you make at any time, or will go down less at any time.

[00:15:27] Hilary Hendershott: But the really interesting thing is what the market neutral long-short strategy does for you because it isn’t even trying to make you money, but while it’s doing what it does, it’s saving you taxes.

[00:15:42] Robert Hendershott: Exactly, because the strategy isn’t operating on its own. We’re taking this and bundling it with your portfolio, so your portfolio has issues. It’s got these big gains, which is, of course, a wonderful issue to have, that you can’t rebalance, you can’t access your money without paying a ton of taxes. So, this long-short strategy adjacent to it that we bundled together with it is going to create a reliable stream of investment losses that’ll make it possible for you to do things in your portfolio like diversifying without taking that tax hit.

[00:16:18] Hilary Hendershott: I’m going to make T-shirts for us that say, “Your portfolio has issues.” So, you’ve mentioned reliable losses a couple of times and you mean losses on the long or short positions that are offset by gains on the other side, not portfolio losses.

[00:16:54] Robert Hendershott: True. And that’s very important. Real losses are bad. You get tax benefits, but you have less money. The tax benefits never offset the fact that you have less money. So, in Ultra Tax Efficient Wealth Management^SM, the losses are created in a slice of your portfolio while the overall portfolio is holding up just fine. So, a simple way to think about this is just imagine you make two bets, one that it will rain tomorrow and one that it won’t rain tomorrow. Now, obviously, you’re guaranteed to win and to lose.

[00:17:30] Hilary Hendershott: Yeah. But if you live in Puerto Rico, you should probably just bet that it will rain tomorrow.

[00:17:35] Robert Hendershott: Exactly. And that’s like the stock market. On average, you want to be long because on average, it goes up. But we’re not trying to necessarily make money here. The bet on it raining and against it raining at the same time, it wouldn’t make any sense if you’re trying to make money, because although you’re guaranteed to win, you’re also guaranteed to lose. But I want to add a twist. So, suppose you could, for tax purposes, realize your loss on the bet that it wouldn’t rain in Puerto Rico, while not realizing your win on the bet that it would rain. And if, by some miracle, it was the other way around, you would still have one winner and one loser. So, you’re able to realize the loss for tax purposes, but you’re not required to realize the gain. It’s there, but you don’t have to recognize it for tax purposes.

[00:18:26] Now, this could, in theory, be possible, because reality and tax reality are not identical. They’re sometimes quite different. And if possible, this would be awesome, because you only pay taxes when you realize investment gains or losses. So, in our fun example here, you are recognizing your loss, betting that it won’t rain while deferring your gain on the bet that it would rain. You have a loss to show on your taxes, but there’s no gain required to show on your taxes. The gain is there, but it doesn’t show up in your taxes, at least not yet.

[00:19:00] So, what we want to do, in the real world, is have losses according to the IRS, according to their rules, with offsetting gains that the IRS lets us defer. That way, the IRS lets you reduce your tax bill elsewhere in life because you have these losses that are recognized, but overall, you don’t have an actual loss in your portfolio. You just deferred the offsetting gains for tax purposes. So, voila, your tax bill is lower.

[00:19:40] Hilary Hendershott: It’s really a win-win. And everybody loves that, but you can’t just take losses and hide your gains because the IRS does not like that very much.

[00:19:49] Robert Hendershott: No. And the rain/no rain example is just for show here. It’s just an example. It’s not going to work under any circumstances. If you gamble, you can’t make bets and recognize your losses while deferring your wins. It doesn’t work that way. But in the stock market, you can take losses and defer gains. This happens all the time. It’s only based on what you sell, what you get out of. And that’s what Ultra Tax Efficient Wealth Management^SM does. It uses an investment strategy that isn’t just focused on returns. It is very consciously creating tax benefits through strategic loss-taking and capital gains deferral.

[00:20:31] Hilary Hendershott: Okay. So, can you give us an example? And this goes without saying, but the example should be 100% legal and above board.

[00:20:40] Robert Hendershott: Of course. Well, okay, so let’s start with a simple example, and this is aligned with the letter of the law. It’s not exactly aligned with the spirit of the law, and I definitely recommend that you don’t do this.

[00:20:54] Hilary Hendershott: Right. Do not try this at home.

[00:20:56] Robert Hendershott: But it’s going to be another illustrative example. So, let’s say you have a million dollars of Amazon stock. You bought it 10 years ago. It cost you $100,000 and in fact, Amazon has done better than 10X over the last 10 years. But we want to keep the example easy so you can easily visualize. So, you have a million dollars of Amazon stock and $900,000 of it is capital gains. If you sell that stock, you’re going to owe capital gains tax. It’s going to be over $300,000 if you live in California. If you don’t sell the stock, you don’t have to pay the tax, but you can’t spend any of your money, and you’ve got a million dollars, which is probably a big chunk of your wealth, tied up in Amazon’s future.

[00:21:52] Hilary Hendershott: Yeah. And Amazon feels like a safe bet today, but so did Walgreens 10 years ago, and their stock is down 85% since then. Companies like Intel is down 70% over the last five years. Leading companies that we think are awesome can and do sometimes crash.

[00:22:12] Robert Hendershott: Yeah. A stock that feels like a sure thing like Walgreens is always at risk of a business downturn. Walgreens recently went private for one-tenth of what it was selling for at its peak, and its peak was not that long ago. You also could have a sentiment swing. I mean, we’re seeing that in the stock market all the time. So, it would be great to diversify this Amazon stock, but if you sell, you owe more than $300,000 in taxes. So, your cool million turns out to be less than 700,000. So, you sort of have to take it one way or the other, except now we have a solution.

[00:22:50] Hilary Hendershott: Right. So, you’re thinking, “How can I sell my Amazon stock without taking the tax hit? It sounds, Hilary and Robert, like you’re saying I can have my cake and eat it too.” And that is exactly what I thought when I first heard about this.

[00:23:09] Robert Hendershott: And it is in the best possible way. So, here’s a simplified version of what we would do with that million dollars of Amazon stock. And I want to be clear, this is not investment advice. Do not try this at home. There is a real risk that what I’m going to describe here would be disallowed by the IRS because although it might abide by the letter of the law, it is absolutely not in the spirit of the law. So, this is an illustrative example, not anything I would recommend. And if we change it a little bit and get more serious about the investing side of the strategy, it absolutely is aligned with both the spirit and the letter of the law. So, this is not what you should do, and we’re going to get to what you would actually want to do.

[00:23:58] Hilary Hendershott: Okay. You’ve heard us, listener. Don’t go out and try this.

[00:24:02] Robert Hendershott: So, what we’re going to do is we’re going to take three ETFs–the SPY, the VOO, and the IVV–which are all popular S&P 500 ETFs. So, they’re managed by giant institutions, State Street, Vanguard, and BlackRock, respectively. They’re incredibly liquid. They are virtually identical, but they are three distinct tickers. So, we’re going to take your million dollars of collateral and we’re going to, because you have Amazon shares, we’re going to borrow a million dollars to buy IVV, one of those S&P 500 ETFs, and we’re going to simultaneously short $1 million of SPY, another of those S&P 500 ETFs.

[00:24:53] Now, in your portfolio, instead of just $1 million of Amazon stock, you have $2 million worth of stock, 1 million each of Amazon and IVV, and your short $1 million of stock, the SPY. So, your net position is the same. You have these offsetting long and shorts in the S&P 500 ETFs but your portfolio is very different.

[00:25:53] Hilary Hendershott: So, nothing has really changed. The long and short ETFs just cancel each other out.

[00:26:01] Robert Hendershott: Right. So, there’s no difference. We have the Amazon stock and we basically are betting that it’s going to rain or not going to rain. The long-short ETFs are a pair of bets that the market will go up, and that the market will go down, the long that the market will go up, the short that it will go down, and they cancel out.

[00:26:21] Hilary Hendershott: Because the strategy, in this case, the hypothetical one Robert’s talking about, isn’t about adding incremental return. It’s just supposed to create tax benefits.

[00:26:33] Robert Hendershott: Yes, and here’s how that goes. So, next month, Amazon stock and the S&P 500 do whatever they’re going to do, they go up, they go down. Let’s say that Amazon is up 5% and the S&P 500 is down 2%. So, your portfolio is up 5% just like it would have been if it was still only Amazon stock. The IVV long position, that’s the S&P 500 ETF that we bought is down $20K because the S&P 500 fell 2%. The S&P short position, the SPY, is up $20K. So, the down $20K, up $20K cancel out, and it looks like it’s a complete wash, except at this point, we’re going to sell the IVV ETF shares, the one that’s at a $20K loss, and realize that loss while we maintain the short position and defer the $20K gain in the SPY.

[00:27:37] Hilary Hendershott: So, if you sell your index shares, the IVV, wouldn’t that just leave you short the market?

[00:27:42] Robert Hendershott: It would, absolutely, and we need to sell them to realize the loss. But we can also immediately buy $980,000 of VOO, the third S&P 500 ETF. So, we are now short $980,000 of the SPY after the 2% drop, we buy $980,000 of VOO to offset that, and we’re right back to where we started. The long S&P 500 ETF and the short S&P 500 ETF are completely balanced, but we have booked a $20,000 loss.

[00:28:23] Hilary Hendershott: And there’s no real change because you’re just swapping one S&P ETF for another, but you have realized the loss for tax purposes, and I do realize that this conversation is getting a little bit technical to you, Money Lover, but hang in with us because these calculations are real and we’re providing the foundation that you need to kind of understand this new opportunity that exists for you. So, it is a little bit technical but hang on with us.

[00:28:53] Robert Hendershott: And it is a complicated strategy, and in reality, it’s much more complicated than what we’re talking about here because we’re dynamically swapping out losers to realize the losses and replacing them with something that is very similar, and in this example, identical, because the strategy is creating realized losses without changing your return. So, we have to be very careful how we do it. Now, after this first cycle, you would have $1.05 million of Amazon stock, because Amazon went up, and we’d have the offsetting S&P 500 ETF positions long and short, and we would have $20,000 in tax losses. That’s after one cycle.

[00:29:34] Hilary Hendershott: So, does the process continue?

[00:29:36] Robert Hendershott: We can continue this indefinitely. So, maybe the next month, Amazon and S&P 500 are both up, then we would cover the IVV short, booking an additional loss, and switch back to shorting SPY. So, we’re trading between the three. We always have one long and short and one available to replace the one that we drop out of, the one that shows a loss. You could do this indefinitely, but it would not take that long, maybe a handful of cycles for you to build up $100,000 of losses, or even more.

[00:30:08] Hilary Hendershott: It’s really great. I get so excited about this, and now you can sell $110,000 of your Amazon stock, realizing the massive capital gain on the shares without paying taxes. And this strategy allows you to diversify and enjoy your gains without losing a huge chunk of your money to taxes. So, instead of buying a Lexus and paying the tax man, you end up with two Lexuses.

[00:30:35] Robert Hendershott: Exactly.

[00:30:36] Hilary Hendershott: So, let’s talk about how we know this is legit with the IRS.

[00:30:40] Robert Hendershott: Well, it’s because we’re using that sophisticated long-short strategy with individual stocks, not ETFs, that are essentially identical. Individual stocks that are very different, but in a portfolio, produce the same results. We’re going to realize losses and defer gains. It is completely legitimate to realize losses and defer gains, and it is actually much more effective to create tax benefits through realized losses when you use individual stocks rather than this simple S&P 500 example we just went through.

[00:31:21] Hilary Hendershott: So, given these exciting benefits, why do you think everyone isn’t using an Ultra Tax Efficient Wealth Management^SM strategy?

[00:31:30] Robert Hendershott: Well, if we have our way, everyone will be, and not too long. But there is a reason why we’re talking about this now, and we weren’t talking about it a few years ago. First, it’s only valuable if you have large unrealized capital gains outside of a tax-protected account, like an IRA or a 401(k). Not everyone has these. And that’s why we specified that this strategy is for suitable investors.

[00:31:55] It’s perfect for, say, a Silicon Valley engineer who is at a successful startup and suddenly has $10 million worth of stock, but they can’t sell because in California, well, they can, but it would be hugely expensive because in California they would owe $3.5 million of taxes. Or if you have an entrepreneur who’s built up a business over decades, now they’re selling it for $30 million and they’re going to owe $10 million in taxes. There are a lot of people who this is good for.

[00:32:21] Hilary Hendershott: So, I get why everyone isn’t doing this, but there are a lot of really smart people out there. For example, Silicon Valley entrepreneurs, startup millionaires, investors, or even some regular homeowners who are sitting on seven figures of capital gains in real estate. So, why wouldn’t they all just be doing this for themselves on their own? Everyone can run out and do their own tax loss harvesting at Schwab or Vanguard or wherever they custody without a financial advisor with a little bit of education. I mean, better said, why wouldn’t their financial advisors be doing it for them? We all do tax loss harvesting for our clients. I mean, you said Ultra Tax Efficient Wealth Management^SM works even better than your example, which I have to say, was pretty cool. So, why don’t people know about this?

[00:33:11] Robert Hendershott: Well, it’s hard to execute. You need specific skills. You need experience. You have to have capabilities to get it right. Tax rules are complicated, and the cost of getting things wrong is pretty big. This is an actively traded strategy. There are rules about realizing losses in an actively traded portfolio, rules about deducting financing costs in a levered portfolio. There are a lot of rules that most people have never heard of, and if you violate any of these rules, the tax benefits disappear.

[00:33:43] So, while versions of Ultra Tax Efficient Wealth Management^SM have been running for a while–I would say about a decade–it has only been in a narrow slice of the investor population, primarily for two reasons. First, many big investors, so endowment funds, for example, pension funds, the biggest investors, are nonprofits, and they don’t have to worry about realized gains. They don’t have to worry about taxes. So, people who manage money for these large investors, the most sophisticated money managers have, to a large part, not been worrying about taxes.

[00:34:26] Hilary Hendershott: Yeah, but our clients do.

[00:34:28] Robert Hendershott: Yeah. Individual investors worry about taxes, but they’re often not investing enough money to make it economical to implement a sophisticated strategy like this. So, smaller investors care about taxes, but if we go back 10 years ago, very few of them had big enough portfolios to make it worth the effort to put something like this in place, the cost of putting it in place. Also, the strategy is, like I mentioned at the very beginning, it’s 180 degrees from what traditional long-short investors are trying to do.

[00:35:03] So, hedge funds buy stocks they think are cheap and the short stocks they think are expensive. They plan to sell the former when they go up and they cover the shorts when they go down. Hedge funds are trying to make money, they’re trying to get high returns, and that means creating and realizing investment gains, not losses. Losses are something to be avoided among most sophisticated investors. So, people who have the right skills to do the implementation of Ultra Tax Efficient Wealth Management^SM, they’ve been mostly focused on other things.

[00:35:36] Hilary Hendershott: So, what changed?

[00:36:54] Robert Hendershott: What’s changed is technology, because technology has made implementing this strategy economical for individual investors. I mean, the tax benefits are amazing, but if you go back 10 or 20 years and it’s going to cost tens of thousands of dollars to run the strategy, it doesn’t make sense for a small account, not for $100,000, maybe not for a million. You need technology both in the market and at the investment manager that will keep costs modest. And today, we’re at that point where individuals can benefit from Ultra Tax Efficient Wealth Management^SM. That wasn’t true ten years or even five years ago.

[00:37:36] Hilary Hendershott: So, the result of this is a really huge potential boon to you, the listener, and really investors everywhere. It’s really amazing, the ability to realize capital gains without paying capital gains taxes, at least for a long time. And when investment strategies sound amazing, you have to ask yourself whether they’re too good to be true. So, like anything, this strategy has risks. So, Robert, what are the risks?

[00:38:05] Robert Hendershott: Well, there are risks. It’s a great question because every strategy has risks. And if someone in the investment world tells you otherwise, and it’s not treasuries, you should run. The good thing here is that the risks are very palatable, which basically means they are modest and they don’t hit an investor’s portfolio at the worst possible time, when the market is down. It’s actually the opposite.

[00:39:08] Hilary Hendershott: So, can you describe for our listeners what the risks are?

[00:39:12] Robert Hendershott: Absolutely. Let me talk through them here. There are three. There are three uncertainties when it comes to the management of Ultra Tax Efficient Wealth Management^SM, that is there are three things that can go well or can go less well.

[00:39:26] The first is there is always execution risk in any traded strategy. This strategy does involve a lot of trading as losing positions are realized to get those losses, and they’re replaced with similar securities in order to keep the portfolio balanced. This kind of sophisticated strategy execution you can’t trust to just anyone. Even with reliable technology, you have to follow all the rules, and you have to do things in a very precise manner. So, you need an experienced quantitative trader. And so, we have that for Ultra Tax Efficient Wealth Management^SM. We’re not doing it ourselves, but we have a partner.

[00:40:54] Second, there is tax benefits uncertainty. The tax benefits that Ultra Tax Efficient Wealth Management^SM produces are reliable, and they are fairly predictable, but we can’t tell you the precise benefits that you’ll get over any window, because the opportunity to create tax benefits–what the strategy can actually do–it varies with market conditions. So, in some years, there will be higher benefits than in others. Some years they’ll be lower. On the plus side, the market conditions that everyone hates, which is falling stocks and high volatility, those conditions will tend to provide greater opportunities and more tax benefits. Now, the strategy will create tax benefits if the market goes up, say, 30%. It just won’t create as many as if the market is down.

[00:41:44] Hilary Hendershott: Yeah. But if the market’s up 30%, yay, because you get the benefits of those gains in your accounts. You have more money.

[00:41:53] Robert Hendershott: Exactly. And you will get tax benefits. It’s just you get the most when the market goes down, which is a very nice silver lining.

[00:42:00] Hilary Hendershott: Okay. Let’s not talk about the market going down. But in all seriousness, that is a really nice feature of the strategy. So, I think we’re at the third risk.

[00:42:10] Robert Hendershott: Correct. And this is what we call strategy risk. This long and short portfolio, what we call the overlay, is designed to optimize tax benefits, but there is also absolutely a goal to generate a positive return. If you go long and short two S&P 500 ETFs, like we talked about a little bit ago, your return is guaranteed to be zero, but if you use slightly different long and short portfolios, the return won’t be zero. And Ultra Tax Efficient Wealth Management^SM uses long-short portfolios that are close to, but not identical to an index, and the differences are intentional. They’re designed to produce a small profit.

[00:42:56] Hilary Hendershott: So, the strategy is designed to be profitable and create tax benefits, but of course, there’s no guarantee.

[00:43:57] Robert Hendershott: Right. There is no guarantee of profits, and there’s even no guarantee of tax benefits, although that is very, very likely. Now, regarding profits, the overlay portfolio systematically leans towards things like less expensive stocks, more profitable companies, stocks that have good momentum, things that historically benefit a portfolio, so we expect them to generate a small, positive return, but there is no guarantee. That said, I think this is a solid, dynamic, quantitative approach to take in the long-short portfolio.

[00:44:34] Hilary Hendershott: So, in your estimation, is the strategy really modest risk? I mean, we just spent a lot of time talking about risks.

[00:44:43] Robert Hendershott: Fair enough, but it really is. We are spending time here talking about risk because we spend a lot of time doing our due diligence, exploring and thinking about the risks. Bottom line, there are risks because you have to take risks to get investment benefits. Again, if anyone tells you otherwise, you should run. What you want is to take small risks to get large benefits and that is absolutely the case here.

[00:45:09] Hilary Hendershott: All right. Risks covered and addressed. Let’s go back to the fun stuff. How big are the tax benefits really?

[00:47:34] Robert Hendershott: The benefits are big. Ultra Tax Efficient Wealth Management^SM creates its benefits through realizing investment losses while deferring gains, which allows tax savings that can continue to compound for as long as the gains are deferred. And over a lifetime, that can be huge.

[00:49:06] Hilary Hendershott: One way to think about it is like your retirement accounts. So, you’re saving in a retirement account, and that doesn’t eliminate taxes, but over time, you amass bigger and bigger benefits from saving in that 401(k) or IRA through compound returns. And the same is true for Ultra Tax Efficient Wealth Management^SM. Only in this case under current law, maybe the tax is never paid because–and listeners may or may not know this–but if someone dies with appreciated assets, their heirs get a level set from the IRS and don’t owe taxes on that asset. That’s called the step-up in basis.

[00:49:45] I really don’t want to get into that right now, but it’s a pretty valuable tax avoidance strategy. Unfortunately, and not to be macabre, but you do have to die to take advantage of it. So, it’s valuable to you only in the sense that it’s valuable to your kids. So, back to it. Robert, for investors with large capital gains, the benefits are huge. How quickly can the strategy create tax benefits?

[00:50:09] Robert Hendershott: The benefits start to accrue immediately. Once we start the strategy, the benefits start to build up. How quickly they accrue depends on how aggressive we want to be, and the strategy scales so you can generate more tax benefits faster, as long as you’re willing to accept proportionately higher costs and risk. So, the right approach depends on the specific situation. But the bottom line, the answer is benefits can accrue fast, and at the same time, it’s important to make sure that each strategy is suitable for the particular situation.

[00:50:43] Hilary Hendershott: Right. So, let’s talk about how we decided to do that because we meet people with capital gains in their lives, but who have very different situations.

[00:51:23] Robert Hendershott: Ultra Tax Efficient Wealth Management^SM is more analogous to financial planning than it is to investment management because it needs to be personalized, although there are consistent principles. See, all investors benefit from holding a consistent, widely diversified portfolio. That’s a solution that isn’t personalized. Individual tax management strategies, on the other hand, are necessary to take the full advantage of what Ultra Tax Efficient Wealth Management^SM can create.

[00:51:52] Hilary Hendershott: Right. But there are situations that can consistently benefit from Ultra Tax Efficient Wealth Management^SM, right, any investor that has large unrealized capital gains.

[00:52:04] Robert Hendershott: Yes, and it’s particularly advantageous when that portfolio has issues, if it’s under-diversified. And of course, these gains can be anywhere. They could be in securities, they could be in real estate, they could be in a business that is going to be sold. I think the prime situation is still probably an early employee at a successful Silicon Valley startup. But there are many, many other cases where Ultra Tax Efficient Wealth Management^SM would provide large benefits.

[00:52:36] Hilary Hendershott: Much of the customization that we can do for you has to do with when you expect to take the capital gains. So, if you sell a house or a business in 2025, that’s fully taxable in 2025 but with many other situations, we have control over when that tax happens, and so we can customize the amount of risk that you’re taking.

[00:52:57] It is worth noting that Ultra Tax Efficient Wealth Management^SM probably can’t help investors avoid taxes on income, not unless, for some reason, capital gains are a part of your compensation or salary. But someone with a high salary can also reap the benefits of Ultra Tax Efficient Wealth Management^SM after they build wealth by saving some of that high salary. The long-term benefits could be huge. Ultra Tax Efficient Wealth Management^SM is suitable for investors who either have or expect to have in the future substantial unrealized capital gains.

[00:53:34] Robert Hendershott: Yes. And the sooner you start working the strategy, the more you can do with those future, currently, and hopefully forever, unrealized capital gains or at least untaxed capital gains. But Ultra Tax Efficient Wealth Management^SM continues to create tax benefits after people reach retirement. That is, if people have a big portfolio that they’re now this nest egg that they’re spending down, they can get big benefits from the strategy.

[00:54:04] Now, it doesn’t matter for people with pensions or tax advantage retirement accounts that are providing the bulk of their retirement income, but any retirement savings outside of that is a huge opportunity for Ultra Tax Efficient Wealth Management^SM. And generally, later in life investors, they tend to have more appreciated assets of all kinds, which is a strategy sweet spot.

[00:54:33] Hilary Hendershott: So, that’s really it for today, listener. At this point, my team of financial advisors is ready and waiting to talk with investors who think, after listening to this conversation, that they could benefit from Ultra Tax Efficient Wealth Management^SM. Each tax-saving plan that we provide will be customized to your specific situation. Of course, you get to evaluate that before making any commitments. If you still have questions about how the solution works, after listening to this, we’re here to help answer those questions for you.

[00:55:22] In our next episode of Love, your Money^®, Robert and I are going to take a deeper look at this solution, Ultra Tax Efficient Wealth Management^SM. We are going to talk about some of the crazy and illegal things people have tried in order to avoid paying taxes, and we’re going to explain how this works with tax law provisions instead of trying to get around them.

[00:56:31] We’ll also discuss why this is a specific form–really, so far, the only specific form–of active management that Robert and I are getting behind for clients of our firm, my firm. For 25 years of my career, I’ve shied away from anything resembling active management. I’ve talked about that before on the podcast, and now we’re not just willing, we’re eager to take advantage of this opportunity. I brought my husband out of retirement. It’s really big. I’m not over-exaggerating this.

[00:57:01] And in the next episode, we’re going to walk you through some hypothetical examples of this strategy in action, so you can see how powerful it is in practice. There’s even more but if you’re ready at this point to discover, if UTEWM^SM, that’s Ultra Tax Efficient Wealth Management^SM can benefit your portfolio, you really don’t need to wait. You can just fill out our contact form at HendershottWealth.com/contact. Thanks for listening, Money Lover, and I will catch you in the next episode.

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