When you've sold and have a large sum to invest, the asset mix and types of different assets are a big part of tax planning and optimization, says Jonathan Townsend, a partner in BDO's Wealth Advisory Services practice. In terms of asset classes, there are income-producing investments, public equities, infrastructure, real estate, alternative investments, and private equity.
Risk and diversification are important factors to consider when building an investment portfolio. Most entrepreneurs are taking on a large amount of risk because they have all their eggs in one basket and may depend on one major customer. “When putting your money in a well-diversified portfolio, you've lowered your risk,” he explains.
Your portfolio will generate capital gains, income (whether it be dividends or interest), and return of capital. As a result, you should consider what types of investments should be held in which vehicles, whether it's a family trust, investment holding company, registered accounts, or non-registered accounts.
Another strategy is to purchase permanent life insurance, which provides three major advantages.
First, it offers liquidity when you pass away. A complex estate may take 12 to 18 months or more to settle and having life insurance means other family assets won't need to be sold off.
Second, the proceeds can be used to pay capital gains taxes or extract from an investment holding company tax efficiently, which helps protect the estate from tax erosion.
And third, it can be part of the fixed-income side of the portfolio. “The after-tax returns are pretty hard to beat,” says Jeff Noble, a director in BDO's Wealth Management practice. He notes that life insurance is a good alternative to bonds in today's low-rate environment.
Other tax strategies may involve the creation of an investment holding company for the family or income splitting with your spouse/partner and family members.