The search for the elusive tax alchemy

Alchemy: “A power or process that transforms something in a mysterious or impressive way.”

Investors deeply dislike paying taxes—so much that they’ll often make decisions that reduce wealth in order to reduce taxes. The real goal isn’t minimizing taxes; it’s maximizing after-tax wealth. Those two goals are often not the same.

Like King Arthur searching for the elusive Holy Grail, investors keep looking / hoping they can find the elusive way to not pay investment taxes. Copyright rules prevent me from showing a picture of Monty Python and the Holy Grail, so below is my AI, copyright free picture:

During this quest, there is the continued belief that somewhere, somehow there is tax alchemy that can make taxes simply disappear.

Below are some of the more common tax alchemy attempts—and what they actually accomplish.

#1 | Step-up in basis at death

• A powerful tool for heirs, but it requires holding assets for life—a constraint many overlook.
• Great for beneficiaries; a steep price for the owner.
• Still one of the closest things to “real” tax alchemy.

#2 | Direct indexing

• Potentially expands the universe of securities that can generate losses to offset gains.
• Absent material cash flows into the account over time, the account may “run out of gas” in its ability to harvest meaningful losses in the future.
• May become increasingly locked-up over time and investors may be left with an essentially passive portfolio without the benefit of paying passive fees.
• Useful in many situations, but generally no magic elimination of taxes on appreciated assets needed during an investor’s lifetime.

#3 | Section 351 ETFs

• Move appreciated securities into a newly created ETF and receive a diversified basket.
• You keep your original basis—so the potential tax bill remains unchanged.
• Helps with diversification; does not erase gains.
• Rules are complex and do not work for everyone.

#4 | Buy / borrow / die (borrowing against your portfolio)

• Borrow against the portfolio to avoid selling, then let heirs repay the loan and receive a step-up in basis.
• Interest isn’t free. There is a cost for the borrowing.
• Margin requirements can hurt during downturns.
• Concentrated positions may increase the risk of forced sales.
• Typically works best for ultra-high-net-worth (UHNW) clients using securities-based lending.

#5 | Section 1031 exchanges

• Also referred to as “Like-Kind Exchanges.”
• Allows deferral of gains in investment real estate.
• Useful, but only in a narrow asset category. It is not available for stocks, bonds, mutual funds, or ETFs.

#6 | Tax-loss harvesting

• Excellent for tax deferral—especially if assets eventually pass to heirs.
• But remember: lower basis today = potentially larger tax later.
• There is definite value in deferring a tax paid today vs. paid later (power of compounding on tax not paid).
• Upon a tax-loss harvesting trade, the return of the newly acquired asset must equal or outperform the prior investment. Investors should not harvest tax loss just for the sake of it. Need compelling replacement investment.

#7 | Opportunity zones (OZs)

Created to drive investment in underdeveloped areas. Rolling capital gains into a Qualified Opportunity Fund (QOF) can offer:

• Tax deferral: Gains are deferred until the OZ investment is sold, or up to 5 years under the new rules.
• Tax reduction: Longer holding periods can increase basis, lowering the deferred gain.
• Tax elimination: Gains on the OZ investment can be excluded if held for at least 10 years.
• New One Big Beautiful Bill Act (OBBBA) Update:
  • Rolling 5-year deferral for new OZ investments.
  • Creation of Rural Opportunity Zones, expanding beyond urban areas. More to come in early 2026 on identifying the targeted rural properties.

But none of this matters if the underlying investment is poor. Many OZ deals underperformed—due diligence is critical.

#8 | Exchange funds

• Investors contribute a concentrated stock position and receive a diversified basket.
• Great diversification tool for those with large single-stock risk.
• Requires long lock-ups and investor accreditation.
• As with Section 351 ETFs: diversification improves, but the gains remain.

#9 | And finally: The Steve Martin Plan

Readers of a certain age may remember when actor/comedian Steve Martin did stand-up comedy in the 1970’s/1980’s. He did a bit where he promised how to make $1,000,000 AND not pay taxes. It went like this:

• First, you get $1,000,000 …
• Then two simple words will keep you from owing the taxman any taxes: “I FORGOT!”

There you have it, how to get $1,000,000 AND not owe any taxes. A classic bit—but not exactly IRS approved.
(Audio link shared for those who haven’t heard it)

So what actually works?

There is no true tax alchemy—and investors should never pay more than required. But smart planning can materially increase after-tax, real-world wealth:

• Asset selection
• Asset location
• Asset allocation
• Thoughtful withdrawal sequencing

At Frontier Asset Management, we create globally diversified strategies designed to manage risk and strive to maximize after-tax wealth. We’ve been doing this for investors for more than 25 years.

Most investors will eventually need to use their appreciated assets during life. And when something rises in value, taxes generally follow when you access it. The following strategies can help, but rarely eliminate taxes entirely:

• Life insurance designs
• Roth conversions
• Health Savings Accounts (HSAs)
• Charitable planning

The goal isn’t zero taxes—it’s maximizing after-tax wealth.