Many investors find themselves with a substantial portion of their wealth tied up in a single company. This might come from executive compensation, an inheritance, or just savvy stock picking. What starts as a well-balanced portfolio can easily become dominated by one stock, especially in regions with booming tech sectors.
When a single stock makes up more than 10% of your portfolio, you’re taking on more risk than you might realize. It's easy to overlook this risk if you’re confident about the stock’s future or trying to avoid taxes. However, excessive concentration can lead to significant losses and threaten your long-term financial goals.
So, how should you handle a concentrated position in your portfolio? It really comes down to your financial plan and long-term objectives. Some may need to sell part of their holdings to invest in income-generating assets, while others might wish to pass their wealth to heirs. To navigate this, consider these questions:
There are various strategies to reduce risk and manage taxes, each with its pros and cons. Often, a combination of approaches works best. It’s a good idea to discuss these with your wealth consultant and tax professional to find the right strategy for you. If you’re curious about how Evergreen can assist you, click here to take our client compatibility survey.
Selling Shares
The most straightforward approach is to sell some or all of your shares. While this may not be the most tax-efficient short-term solution, it can be managed through a well-thought-out plan. By selling shares gradually and considering your tax situation, you can reduce the tax impact and avoid selling at an inopportune time.
Hedging Strategies
If you can’t sell your stock or want to avoid immediate taxes, you might consider hedging strategies. One option is using equity collars, which involve selling call options (allowing someone to buy your stock at a set price) and buying put options (allowing you to sell your stock at a set price). These strategies can be complex and have significant tax implications, so working with a tax advisor is crucial.
Exchange Funds
Exchange funds let you swap your concentrated stock for a diversified mix of stocks, offering immediate diversification without a taxable event. However, these funds often require a commitment of several years and may come with higher fees and minimum investments. While they help manage company-specific risk, they don’t eliminate capital gains, as your original cost basis remains.
Qualified Opportunity Zones
Qualified Opportunity Zones offer a way to defer gains from sales, though they don’t eliminate them. Created to provide preferential tax treatment for investments in economically distressed areas, these zones allow for deferral of the gain until a future date, with potential tax-free gains on the invested amount if held long-term. These funds have high minimums and varying returns, but they might suit those looking to defer significant capital gains.
Gifts to Loved Ones
If the stock isn’t needed for your retirement or cash flow, consider gifting it to loved ones. This can remove the stock from your estate and potentially shift the tax burden to beneficiaries in lower tax brackets. You can also make gifts to trusts to restrict access to the funds. Remember, the recipient inherits the original cost basis, so discuss tax implications with them beforehand.
Charitable Giving
For those with philanthropic goals, donating appreciated stock to charity can be a great way to reduce exposure. Charitable Remainder Trusts (CRTs) offer an immediate tax deduction while providing income to you. The assets are diversified, and after the trust ends, they go to a chosen charity. Donor Advised Funds (DAFs) allow you to make larger contributions in one year to maximize tax deductions, then distribute to charities over time. These options are valuable for those committed to giving back.
When Not to Sell
Sometimes, keeping a concentrated position makes sense, especially if you plan to pass it on to heirs. This way, they receive a stepped-up cost basis and can diversify without triggering capital gains taxes. Always review this decision in the context of your overall financial and estate plan to find the best strategy for your situation.
2. IRS Estate and Gift Tax Updates
DISCLOSURE: Securities highlighted or discussed in this communication are mentioned for illustrative purposes only and are not a recommendation for these securities. Evergreen actively manages client portfolios and securities discussed in this communication may or may not be held in such portfolios at any given time. This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Any opinions, recommendations, and assumptions included in this presentation are based upon current market conditions, reflect our judgment as of the date of this presentation, and are subject to change. Past performance is no guarantee of future results. All investments involve risk including the loss of principal. All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed and Evergreen makes no representation as to its accuracy or completeness.