Often investors find that a significant portion of their assets may have accumulated in one particular stock. Perhaps you have a long career working for the same company, or you may have acquired stock through inheritance. If this is the case, it is easy to reach the point where this single holding is sizable enough that you may want to evaluate your situation and consider a range of strategies around the stock.
There are several alternatives for managing concentrated stock positions. However, such recommendations really depend on your individual circumstances and the particulars of your financial and tax situations. Another variable is whether you are an employee or a corporate insider. If you are a corporate insider – if in doubt, contact your corporate counsel – you may be subject to certain legal and company considerations for disposing of your company stock. You and your financial adviser should work with your legal and tax professionals to help evaluate possible strategies.
The list of tools or alternatives for managing a concentrated equity position may include:
Gradually selling and repositioning
Hedging alternatives for managing risk
Estate planning and charitable techniques
Borrowing against your stock
Often a combination of strategies is an optimal solution. You can earmark a certain portion to sell, to hedge, and to help meet your tax and philanthropic goals.
Sometimes the simplest solution is best. You can gradually sell shares and reinvest the proceeds into other investments. Selling over time may help you spread your gain or loss over time as well as the attendant tax impacts and help diversify and better control your financial situation.
Other strategies, such as hedging or establishing a charitable remainder trust, can be combined with this strategy. Your financial adviser can help you evaluate the variations of this approach. Certain hedging strategies let you control your exposure to any one stock and help you control downside risk.
With a substantial position in one stock, you may look for strategies that will help reduce your overall income and estate tax liabilities and help you achieve your philanthropic goals. There are charitable giving strategies that can provide you with a current income tax deduction, create a continuing source of income for you or possibly your heirs, and provide a way to avoid paying current capital gains tax on appreciated assets.
A simple tax-efficient way to benefit the charitable organizations you support is to consider making your annual charitable gifts or pledges with appreciated stock instead of cash. You will conserve your cash while avoiding the taxable capital gains you would create by selling the stock.
Determining which of these solutions is appropriate for your circumstances requires an in-depth evaluation of the stock you own, any restrictions you may be subject to, your financial position, and your objectives. Consult with your Financial Advisor, who can consult the team of professionals at his or her firm to help evaluate your situation and provide you with a range of strategies to consider in view of your financial goals.
Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Wells Fargo Advisors and its affiliates do not provide legal or tax advice. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.
Margin borrowing may not be suitable for all investors. When you use margin, you are subject to a huge degree of risk.
This article was written by Wells Fargo Advisors and provided courtesy of Jonathan Buoni, Financial Advisor, in Springfield, MA at 413-755-1171. Investments in securities and insurance products are: Not FDIC-insured/not bank-guaranteed/may lose value. Wells Fargo Advisors LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. ©2013 Wells Fargo Advisors LLC. All rights reserved.