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Operational Alpha: Closing the “Asset Location” Gap in Family Wealth

November 20, 2025

The modern Family Office has successfully evolved its allocation strategy. The traditional 60/40 portfolio of public equities and bonds has largely been replaced by an aggressive institutional mandate: distressed debt, private credit, seed-stage venture capital, and direct real estate.

Yet, while the investment thesis has modernized, the operational infrastructure has lagged.

At American Estate and Trust (AET), we see a recurring pattern where sophisticated investment committees identify high-alpha private assets, only to place them into the family’s least efficient tax buckets, such as taxable trusts or personal holdings, simply because their custodial plumbing cannot handle the complexity of the deal structure.

This creates an “Asset Location Gap.” It is a disconnect where high-yield assets (generating ordinary income) and high-multiple assets (generating massive capital gains) are exposed to maximum taxation. The result is a “tax drag” that erodes 20% to 40% of the total return, not due to poor investment selection, but due to poor infrastructure.

For the modern Family Office, securing regulated, tax-advantaged structures for complex private transactions requires execution that meets institutional velocity.

The Mathematics of Tax Drag

Consider a standard allocation: a $5 million commitment to a private credit fund yielding 12% annually.

If this asset is held in a taxable trust or corporate entity, that 12% yield is taxed as ordinary income. Assuming a combined federal and state effective rate of roughly 37%, the net yield drops to approximately 7.5%. Over a 10-year hold, that asset grows to roughly $10.3 million.

Now, consider the same asset held in a Tax-Exempt IRA or Qualified Plan. The full 12% compounds annually without interruption. Over the same 10-year period, the asset grows to roughly $15.5 million.

The barrier to capturing this alpha is rarely a lack of capital or deal flow. The barrier is almost always the custodian. Traditional banks and retail-focused custodians are built for public markets. When presented with a complex subscription agreement, a convertible note, or an LLC operating agreement, their compliance engines often stall, forcing the Family Office to revert to taxable accounts to close the deal on time.

The Strategy: “Convert Low, Compound High”

The most potent lever for a Family Office to close this gap is the strategic Roth conversion. This strategy is specifically designed to exploit the “J-Curve” valuation trajectory common in private equity and venture capital.

The J-Curve describes the lifecycle of a private asset. Valuations often dip or remain flat in the early years (due to management fees, initial capital outlays, or “seed” stage risk) before appreciating vertically upon exit or stabilization.

To capture maximum alpha, the goal is to pay taxes at the bottom of the curve so that the vertical growth occurs in a tax-free environment. We call this “Convert Low, Compound High.”

This strategy is time-sensitive. Valuation windows in private markets are fleeting. If a custodian takes 30 days to review a subscription agreement, the valuation may adjust, or the funding round may close.

Unified Administration: The Nominee Structure

Beyond tax efficiency, Family Offices face a significant administrative burden. You are often managing capital across multiple entities: the Principal’s IRA, the Spouse’s Roth, a Grandchild’s Trust, and a corporate profit-sharing plan.

Investing in a single private deal from four different sources creates friction. It results in four separate subscription agreements, four entries on the issuer’s cap table.

The solution utilized by institutional players is the Nominee or “Omnibus” structure.

In this model, the custodian establishes a single legal holding, titled in the name of the Trust Company (e.g., “American Estate & Trust”), on the issuer’s books. Behind this single line item, the custodian maintains a sub-ledger that tracks the fractional ownership of each specific family account.

Why This Matters for Family Offices:

Cap Table Hygiene: The nominee structure ensures the portfolio company registers the family’s entire commitment as a single, consolidated legal investor. This streamlines capital commitment and significantly reduces administrative burden for the GPs, who only need to track one entry for subsequent corporate actions, documentation, and reporting.
Simplified Capital Calls: The Family Office receives a single capital call notice. The operations team approves one transaction via the custodian’s portal, and the back-office automatically debits the respective sub-accounts (e.g., Dad’s IRA 40%, Mom’s Roth 60%).
Privacy: The family name does not appear on public filings or the issuer’s capitalization table. This reduces solicitation risk and protects the family’s privacy from other limited partners.

It is important to note that this structure is for administrative efficiency and privacy. It does not bypass Prohibited Transaction rules regarding self-dealing between disqualified persons.

Legacy Planning: Optimizing the 10-Year Rule

The passing of the SECURE Act 2.0 changed the landscape of inherited IRAs. Non-spouse beneficiaries (children and grandchildren) can no longer “stretch” distributions over their lifetime. In most cases, they must deplete the entire account balance by the end of the 10th year following the original owner’s death.

For liquid assets, this is merely a tax scheduling issue. For illiquid private assets, it can become a liquidity crisis unless managed correctly.

The “Wait and Harvest” Strategy

If a beneficiary inherits a Roth IRA holding private equity or real estate, the 10-Year Rule offers a unique planning window. Since Roth distributions are generally tax-free, there is no requirement to take incremental distributions in years 1 through 9.

The optimal strategy is often to touch nothing for the full duration. The asset remains in the tax-free environment, compounding for a decade. On December 31 of Year 10, the beneficiary liquidates or distributes the asset in-kind.

Many standard custodians force the liquidation of private assets upon the account holder’s death because they do not want the administrative burden of holding illiquid positions for beneficiaries. To execute the “Wait and Harvest” strategy, the Family Office requires a custodian willing to maintain the private position, service capital calls, and collect distributions during that 10-year window, ensuring the tax shelter is maximized until the statutory deadline.

The Infrastructure Layer

A major friction point for Family Office operations teams is “Shadow Assets”, or private holdings that sit outside the main reporting software, requiring manual entry into Excel for Net Worth statements.

Modern custody must integrate directly into the institutional tech stack. Through integrations like Morningstar ByAllAccounts or direct API integrations, AET can push position data, account information, and transaction history directly into wealth management platforms like Black Diamond, Orion, and Addepar.

Conclusion

The gap between investment strategy and custodial infrastructure is a solvable inefficiency. AET is a custodian built specifically for the complexity of private markets. We help family offices everyday to unlock the full compounding power of their highest-growth assets because they understand right infrastructure functions as a strategic partner in wealth preservation.