Strategies for Reducing Concentrated Stock Ownership, Offered by a Financial Advisor, that Yield Tax Benefits
In the world of wealth management, Kiplinger's Adviser Intel, a team of fiduciary financial planners, wealth managers, CEOs, and attorneys, specialise in wealth building and wealth preservation. They emphasise the importance of a proactive approach to diversifying a concentrated stock position, a common challenge faced by many high-net-worth individuals.
One such challenge is the potential impact of a dip in market value due to company-specific issues, such as a management scandal or regulatory shift. This can hit a portfolio hard, potentially putting a financial future at risk. A proactive approach can protect long-term goals and provide more flexibility and control.
The biggest hurdle to diversifying a concentrated position is often the capital gains tax. However, strategies exist to mitigate this. Donor-advised funds (DAFs) allow for appreciated stock contribution, securing a tax deduction and avoiding capital gains tax on the donated shares. DAFs also provide future cash flow, which can then be used to further diversify the portfolio.
Direct indexing is another strategy that can help. This method allows for mimicking the performance of a broad index, such as the S&P 500, by purchasing the individual securities within it. This keeps the concentrated stock while creating a more balanced, tax-aware portfolio. Capital losses from underperforming stocks can be harvested in direct indexing to offset gains as exposure is gradually reduced.
Charitable remainder trusts (CRTs) can be an effective tool for diversification, especially for those who value philanthropy. By using a CRT, individuals can donate a portion of their concentrated stock to charity, reducing their exposure while still supporting a cause they care about.
Working with a qualified adviser can help evaluate options, coordinate with tax professionals or estate attorneys, and build a customized plan. This is crucial as taking action to diversify a concentrated stock position does not necessarily mean selling everything at once, but requires a clear strategy for when, how, and how much to sell.
A retired pharmaceutical executive recently used direct indexing and a donor-advised fund to diversify a large amount of company stock and secure tax deductions. This case highlights the benefits of seeking expert advice and implementing a strategic plan.
Overexposure to a single stock can subject an individual to greater risk than they're willing to tolerate. If an individual works at the company, the risk doubles due to potential job loss and portfolio decline. When one stock makes up more than 20% to 25% of a total investment portfolio, it's in potentially dangerous territory.
Running tax projections and modeling different sale scenarios in advance can help reveal the full impact and inform a more strategic, phased approach to diversification. It's never too early to start considering these strategies to protect and grow your wealth.
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