Diversification is the foundation of a well-balanced portfolio. Achieving proper diversification can be difficult when one has a concentrated position in an individual stock. Reducing exposure to a concentrated stock position can be hindered by many factors. The most common issues are large unrealized capital gains, emotional attachments, and selling restrictions for executives. This article will focus on methods to help mitigate the impact of a concentrated stock position with significant unrealized capital gains.
Charitable Donations
The simplest way to solve the issue is to sell or donate the stock. If charitably inclined, pre-funding charitable donations through a vehicle such as a donor-advised fund is a great option. Large in-kind charitable gifts are also a good way to fulfill philanthropic intentions. These charitable donations can be used to offset the capital gains from selling additional shares of the stock. Selling may also be a viable solution if there are existing tax-loss carryforwards or if taxable income (and, therefore, the marginal tax bracket) is low for a period.
Options Strategies
If the preference is to wind down the position over many tax years or there is an unwillingness to pay tax, the impact of the concentrated stock can be diminished through options strategies and exchange funds. While there are many varieties of options strategies, a common method uses options to hedge against a decline in value while capping the upside return of the stock. The key is balancing cost with protection. It is essential to consult with wealth management and tax professionals to help select an ideal strategy for your portfolio.
Exchange Funds
Exchange funds are a vehicle used to convert a concentrated position into a diversified basket of stocks. The stock is deposited into an exchange fund, which tracks a broad index, such as the S&P 500. After a minimum seven-year period, a distribution of a diversified basket of stocks can be requested. During this seven-year period, the investor earns the return of the exchange fund portfolio, not the individual stock deposited. While the exchange fund diversifies the portfolio, it does not eliminate capital gains. The cost basis of the diversified basket is equal to the cost basis of the deposited stock.
Forvis Mazars Can Help
Navigating a concentrated stock position in a portfolio can be an emotional and challenging situation. Forvis Mazars Private Client is here to assist and advise you on methods to help you achieve your goals. Please reach out to your local team today!
Forvis Mazars Private Client services may include investment advisory services provided by Forvis Mazars Wealth Advisors, LLC, an SEC-registered investment adviser, and/or accounting, tax, and related solutions provided by Forvis Mazars, LLP. The information contained herein should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned herein, may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed to be accurate as of the time it is presented and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.