deal from one investor to the next, but as a general statement it is true that the wealthier the individual, the greater the proportion of the estate that will go to heirs or charity. A wealthy individual can be thought of as a steward of wealth. Their wealth exceeds their consumption needs, so they are managing their estates on behalf of future beneficiaries. These could be any combination of charities, immediate heirs, and future generations. The first step in investment management for individuals is to formulate the problem in a way that accommodates these complicating factors and maintains a focus on the key variables of risk and return. Most wealthy investors can formulate their problem as: Subject to funding my consumption needs, maximize the risk-adjusted real value of wealth that will be received, net of income and transfer taxes, by my intended heirs and charitable beneficiaries. This formulation is useful because it allows investors to evaluate estate planning, asset allocation, and portfolio management strategies in a consistent manner. Any potential decision can be analyzed in terms of its impact on the expected aftertax real proceeds received by heirs and charities. The expectation of after-tax proceeds can be viewed as a distribution. It has a mean, a median, and a standard deviation. This formulation brings us back to our familiar trade-off between return and risk. It enables us to apply the tools of modern portfolio management to the issues facing individual investors. For example, if an investor is considering a change in asset allocation policy, the proposal can be evaluated in terms of its impact on the distribution of expected future net proceeds. Does the proposed change in asset allocation policy increase or decrease the expected mean? Does it widen or narrow the distribution of expected outcomes? Taxation, estate plans, and spending requirements complicate the calculation of expected after-tax return and expected after-tax risk. One of the key differences between managing the assets of taxable and tax-exempt investors is that these calculations are investor-specific for taxable investors. While these calculations may be complex, they are required in order to properly apply modern portfolio theory to the issues of a taxable investor. TAXATION There are four key forms of taxation to be considered fas of December 2002): 1.    Income tax is applied to taxable interest and dividends using the ordinary tax rate. 2.    Capital gains tax is applied to realized gains and losses. Positions held one year or less are taxed as short-term using the ordinary tax rate. Positions held more than one year are taxed as long-term using the long-term tax rate. Capital gains taxes can be avoided through charitable giving or death. If appreciated assets are given to charity, there is no capital gains tax due on the appreciation. If appreciated assets are held until death, the cost basis is "stepped up" to the current market value, eliminating the potential tax liability. These elements of