Asset Allocation — United States

What makes US allocation distinctive

US households operate in the world’s largest and most developed capital markets. Access to public equities, fixed income, private markets, and alternatives is more comprehensive than anywhere else. The specific tax treatment, particularly the interaction of federal, state, and trust-level taxation, makes certain allocation decisions much more consequential for US households than for households in jurisdictions with simpler tax regimes.

Three US-specific factors shape allocation:

Tax regime complexity. Federal income tax, state income tax, federal capital gains, federal estate and gift tax, and trust-level income tax all interact. Asset location (which accounts hold which assets) is particularly consequential.

Trust situs flexibility. Assets held in US trusts can choose favorable jurisdictions (South Dakota, Delaware, Nevada, etc.) that avoid state-level income tax on trust income. The optimization is worth explicit structural planning.

USD-centric portfolio construction. Most US households naturally build USD-dominated portfolios. Currency diversification is often underweighted; for households with meaningful international children or planned international residency, this becomes consequential.

Account types and tax treatment

The US account landscape requires explicit optimization:

Taxable brokerage. Most flexible. Long-term capital gains rate (23.8% including NIIT at top) for assets held over one year. Dividends and interest taxed at respective rates. Step-up in basis at death, the key tool for permanent elimination of unrealized gains.

401(k) and similar qualified retirement plans. Pre-tax contributions up to annual limits. Tax-deferred growth. Ordinary income tax on distribution. Required Minimum Distributions beginning at age 73 (2026) or 75 (eventually).

Traditional IRA. Similar treatment to 401(k). Contribution limits for high-income households effectively zero; rollovers from 401(k)s are the primary way IRAs grow large.

Roth IRA. After-tax contributions. Tax-free growth and distribution. Income limits on direct contributions; backdoor Roth conversions widely used. A Roth conversion during a low-income year can be meaningfully valuable.

Trust accounts. Tax treatment depends on grantor vs. non-grantor status. Non-grantor trusts face compressed tax brackets, 37% at just $15,200 of undistributed income (2026). State tax on trust income depends heavily on trust situs.

Private foundation or DAF. Not taxed on investment income (subject to 1.39% excise tax for private foundations). The investment policy on charitable assets is often under-managed; better stewardship of charitable vehicle assets can materially extend giving capacity.

529 plans. Tax-free growth for qualifying education expenses. State tax deduction in some states. Five-year gift-splitting enables significant front-loading.

HSAs. For households with high-deductible health plans. Triple tax advantage (pre-tax contribution, tax-free growth, tax-free distribution for qualifying medical expenses). Often underused as a long-term tax-free growth vehicle.

Asset location: the underused US tactic

A meaningful US alpha source with minimal risk: placing tax-inefficient assets in tax-deferred or tax-free accounts and tax-efficient assets in taxable.

Tax-inefficient assets (belong in tax-deferred or tax-free accounts). Taxable bonds, high-turnover active strategies, REITs (which distribute most income as ordinary), commodities, actively managed strategies with frequent realization.

Tax-efficient assets (belong in taxable accounts). Long-held equity positions, tax-managed strategies, direct-indexed portfolios enabling loss harvesting, municipal bonds (already federally tax-free), step-up-at-death candidates.

Many US households hold identical allocations across all account types, missing 30–80 basis points of after-tax return annually that costless restructuring would capture.

Direct indexing and systematic tax-loss harvesting

One of the largest US-specific developments in the past decade. Rather than holding an S&P 500 index fund, direct indexing holds the underlying stocks individually, enabling:

• Continuous tax-loss harvesting as individual positions fluctuate.
• Targeted customization (ESG exclusions, concentrated-position offsets, charitable gifting of specific low-basis shares).
• Basis management at the individual-security level for estate planning purposes.

For a $10M equity allocation in a taxable account, direct indexing typically generates 50–150 bps of tax alpha per year in the first several years (depreciating as unrealized losses accumulate). Providers include Parametric (part of Morgan Stanley), Aperio (BlackRock), Vanguard Personalized Indexing, and numerous others.

The alternatives landscape for US households

US access to alternatives is deeper than any other jurisdiction, but the quality of access varies dramatically by relationship.

Private equity. Top-quartile US buyout funds have outperformed public markets over long periods. Minimums typically $1M+ for LP positions; access through fund-of-funds or platform products at lower minimums. Top-tier funds (Advent, KKR, Blackstone flagship funds) are typically capacity-constrained; access is relationship-driven.

Venture capital. Access to top-quartile venture funds is the binding constraint. For most LPs, access is through secondary markets, fund-of-funds, or established family office relationships. Direct deal flow requires operator or investor networks.

Private credit. Fastest-growing alternative category. Direct lending, asset-based, specialty finance. Yields 7–10%+ after fees for competent managers. Less correlated to equity markets than private equity.

Hedge funds. Historically challenging for US HNW households on an after-fee, after-tax basis. Specific strategies (structured credit, arbitrage, macro in specific managers) remain useful in the right portfolio.

Private real estate. Sponsor-driven deals, funds, direct ownership. Tax characteristics highly favorable (depreciation, 1031 exchanges, pass-through treatment). Often underweighted by households without real estate-native advisors.

Private market secondaries. Purchasing LP interests at discounts to NAV. Increasingly accessible to large households. Useful for accelerating private market exposure and capturing specific discount dislocations.

State-level allocation considerations

The state of the household’s residence affects allocation decisions meaningfully.

Municipal bonds. Federal tax-free; often state tax-free if issued by the state of residence. For high-income California or New York residents, in-state munis can deliver effective yields 30–40% higher than equivalent taxable bonds on an after-tax basis.

State-level QSBS treatment. California does not recognize the §1202 QSBS exclusion. New York does with modifications. Most other states follow federal. Affects concentrated position planning.

Real estate tax deduction limitations. The TCJA $10,000 cap on state and local tax deductions affects residents of high-tax states disproportionately. Some states have enacted workarounds for pass-through business owners; the actual benefit varies.

Estate tax by state. Sixteen states plus DC impose estate or inheritance tax, often at much lower thresholds than federal. Allocation and ownership structure should reflect the specific state regime.

Currency allocation

Most US households run heavily USD-concentrated portfolios. For many households, this is appropriate, obligations are in USD, retirement is likely in USD, life is denominated in USD. For households with meaningful international exposure, the analysis is different.

Specific situations where USD concentration may be excessive:

• International children. Children planning to study or settle abroad will have non-USD obligations.
• Second homes abroad. Maintaining residences in specific foreign currencies creates local-currency spending needs.
• Planned future international residency. Moving to Portugal, UAE, or similar jurisdictions creates future local-currency needs.
• Reserve currency deterioration risk. While historically the USD has been exceptionally stable, diversification risk management can include modest non-USD allocations.

For most US households, 10–25% non-USD exposure through international equities and bonds is sufficient. Higher allocations are typically specific to the households with real foreign obligations.

Common US allocation failure modes

Identical allocation across all accounts. Missing the asset location opportunity. Standard error; fixable with one-time restructuring.

Trust income taxed at grantor rates unnecessarily. Non-grantor trust income at compressed trust rates when distribution to lower-bracket beneficiaries would produce better net outcome.

Passive acceptance of proprietary products. Private bank’s in-house funds, structured notes, or alternative platforms adopted without comparing external alternatives. Can compound to 150–200 bps of annual fee drag.

Over-allocation to concentrated positions well beyond diversification needs. Founders holding 70%+ of net worth in one stock for 5+ years post-IPO. Emotional rather than financial reasoning drives this more than any other portfolio mistake.

Under-allocation to private credit. A category with structural yield advantages over public credit for competent managers. Many portfolios retain public fixed income allocations that would be better deployed in direct lending.

Committing without calling. Private fund commitments that remain uncalled for years, paying management fees on dry powder. Should be modeled explicitly in liquidity planning.

Over-engineering alternative exposures. Too many funds, too much overlap, too much fee stacking. A carefully chosen set of 5–8 core alternative relationships often outperforms a portfolio of 20+ fund commitments.

Advanced US allocation patterns

Coordinated direct indexing with tax-loss harvesting at scale. Custom direct-indexed portfolios, coordinated with charitable gifting of specific low-basis lots, producing continuous tax alpha.

QSBS stacking planning integrated with portfolio construction. For founder households, the allocation plan integrates with the concentrated stock strategy. Diversification through exchange funds, structured products, and eventual sale timing.

Opportunity zone allocation. For households with significant recent or planned capital gains, structured OZ investments provide deferral and (on long holds) partial elimination.

Private placement life insurance (PPLI) for tax-inefficient exposures. Wrapping hedge fund or alternative exposure in a PPLI policy converts ongoing tax drag into tax-deferred growth plus tax-free death benefit.

Trust-level allocation with state tax optimization. Assets held in South Dakota or Delaware trust structures face no state income tax. For high-income assets, trust holding can be materially tax-efficient.

Factor-based and systematic strategies. Institutional-style allocation to factors (value, momentum, quality) through systematic managers or custom implementations.

Where to go deeper

TIGER 21 runs structured portfolio reviews where members present their full allocation to peers, often the most useful critical feedback US principals receive on their portfolio. Long Angle and founder-specific groups workshop allocation decisions in similar formats. See also Tax Strategy, US for the broader tax architecture and Concentrated Stock, US for the coordination between concentrated positions and the rest of the portfolio.