Why the Rich Get Richer

Ken Fisher is one of my favorite columnists and a well respected writer for Forbes magazine.  His personal investing mantra, while deceptively simple, goes something like “the key to being a successful investor is to know something that others don’t know”.  Well, ok – that seems pretty basic, right?  We’d all like to know what others don’t know.

Personally, I think it is more about taking the time to learn what others won’t or choose not to learn.  Take the Master Limited Partnership for example – one of probably the least understood, yet most tax efficient investment vehicles available to the public.  The wealthy typically benefit from these investments because they have the luxury of private-client wealth managers and estate planning (i.e., they are fortunate enough to “know what others don’t know”).  However, the average Joe (like you and me) can also benefit in the same way.

MLPs and Estate Planning

So, why do the rich just keep getting richer?  Money that rolls from generation to generation, besides benefiting from the power of compounding interest, also grows through good estate planning.  That means making sure the estate is structured in the most tax efficient manner possible.  MLPs are excellent vehicles for this – why?  Per Investopedia’s article titled Discover Master Limited Partnerships:

“MLPs can be used to gain current income while deferring taxes…This can be taken one step further when an MLP investment is used as a vehicle for estate planning.  When an MLP unitholder dies and the investment is transferred to an heir, the cost basis is reset to the market price on the transfer date, eliminating any accrued tax liability caused by return of capital.”

How’s that for tax efficient?  When you die and pass on any LP units to your heirs, you effectively shield them from taxes by resetting their accrued liability to zero.  Not too shabby, eh?