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Strategies to Own a Concentrated Stock?

Own a Concentrated Stock Position? Our 5 Strategies to Help Manage Risk and Taxes

Stock compensation can be a wonderful complement to a traditional compensation package, oftentimes contributing significantly to an investor’s net worth. However, there is an overlying risk to investors who have too much of their net worth concentrated in the stock of one company. This is more complicated if this stock has appreciated to an extent that selling would result in a substantial capital gains tax liability.

How can an investor mitigate the risk of having too much of their net worth concentrated in a single appreciated stock, and avoid significant tax liabilities? 

Multiyear-Sales Strategy 

Some investors may feel that the solution to owning an overconcentration of stock in a single company is simple: sell all of the stock and reinvest the proceeds in a diversified portfolio. While this strategy has the obvious benefit of immediately eliminating the overconcentration risk, the tax “hit” of utilizing this strategy can be substantial – especially considering that investors who received the stock as compensation may have a very low (or no) cost basis in it.

One approach to mitigate the tax impact of these stock sales is to amortize them over a period of two or three years. While this will not reduce an investor’s risk exposure as quickly as an outright sale, this strategy has the advantage of spreading the capital gains taxes over a multiyear period – allowing an investor to better control the timing of the capital gains with the goal of realizing more of these gains in relatively low tax years.  

 Put Option or Protective Equity Collar

A put option gives an investor the right to sell a stock at an agreed upon price on or before a particular date. The advantage of owning a put option is that it establishes a “floor” price at which the investor will be able to sell a stock position. This greatly reduces an investor’s downside risk, while at the same time allows them to retain the unlimited upside.

Instead of paying “out-of-pocket” to cover the premium (cost) of the put option, an investor can simultaneously sell a call option, which gives the purchaser of the call option the right to buy the stock at an agreed upon price on or before a particular date.

The strategy of simultaneously buying a put option and selling a call option is known as a protective equity collar. The potential drawback of an equity collar is the investor is now limited on the upside of the stock price as well. However, understanding that the premium from selling a call option will often cover the entire premium to purchase the put option, an equity collar can be a low-cost approach to hedging a concentrated stock position. Buying and selling options is best handled by a financial professional working on your behalf. 

Pool Shares into an Exchange Fund 

Exchange funds are private placement partnerships where an investor contributes a concentrated stock position into a fund that includes a mix of other stock positions. Oftentimes, these other stocks were donated by investors that had the same intent of diversifying their own appreciated stock positions.

With exchange funds, each investor receives a pro-rata share of the partnership (measured in units) based on the value of the stock that they contributed.

While one obvious advantage of an exchange fund is immediate diversification, an additional appeal of this strategy is that capital gains taxes are deferred until the investor sells their fund units. 

There are several important disadvantages of exchange funds, such as the typically high fund management fees, the lack of control over the other stock positions in the fund, and the lock-up period before an investor can sell their units (which is often as high as seven years). Further, exchange funds are regulated private placements, so they are typically subject to investment minimums and only available to investors that meet certain net worth thresholds.

Variable Prepaid Forward Contract

A Variable Prepaid Forward (VPF) contract is an agreement that an investor will sell a specific number of shares at a discount (usually between 75-90%) at a pre-specified future date in return for an upfront cash payment.

The “variable” in the term VPF refers to the fact that the shares the investor is selling at a future date are not fixed and are dependent on the performance of the stock. A lower stock price results in more shares sold to satisfy the obligation and a higher stock price results in fewer shares sold.

The benefit of a VPF contract is the immediate liquidity received from the cash advance. In addition, the use of the VPF contract allows for the deferral of capital gains – as the variability of the shares to be sold means that a VPF contract is not deemed a constructive sale by the IRS until the shares are delivered. However, in order to avoid IRS scrutiny, a VPF contract should be drafted by a qualified tax professional or lawyer. 

Charitable Gifting

While charitable gifting is a broad category that requires further in-depth discussion, there are several charitable gifting strategies an investor can utilize to reduce the risk of an overconcentrated stock position.

The simplest strategy is for an investor to donate the overconcentrated stock position to a charity (or charities) of their choice. Not only will an investor generally receive the same exact 

tax deduction as if they donated cash, donating stock has the dual benefit of eliminating the capital gains tax that would be associated with selling the stock outright. 

In our view, donating stock is a great way for an investor to both reduce their concentrated stock position and fulfill their charitable intentions.

Pairing this with a Donor-Advised Fund (DAF), a charitable investment account, can streamline the process of gifting stock and has the added benefit of allowing an investor to control the timing of both their tax deductions and their donations.

There are also different charitable trusts that may be appropriate for an investor with an overconcentrated stock position. These types of trusts, which include a Charitable Remainder Trust (CRT) and Charitable Lead Trust (CLT), allow an investor to better control and customize the charitable strategy that works best for them.

Charitable trusts come with material costs and added complexity, and we recommend you work with an experienced estate planning attorney and your financial advisor to determine the best choice for you.

How Can We Help?

At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to advise you, and will work with you to decide the optimal strategy for your concentrated stock position. 

If you would like to discuss further, we  encourage you to call, 916-405-9166, or email to open an objective dialogue.

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Should We Fret Over the Threat of $27 trillion of U.S. Debt?

$27 trillion. That is where the United States’ current debt load currently stands as of 10:40 a.m. today:

The budget deficit is expected to be $3.3 trillion just for 2020, as the Federal government seeks to provide stimulus to our economy in the face of the COVID-19 crisis. This has added $2 trillion to our national debt, on which in most months we are spending more than $1 billion a day just in interest. 

For perspective, here is a sobering infographic (yes, that is a football field in front of the Statue of Liberty) depicting what $20 trillion looks like. Each pallet, or “brick,” represents $100 million:

Infographic courtesy of

Unless there is some new economic or societal model that none of us are aware of, our country’s debt will almost assuredly never be paid back. Politicians love promising us the world, and when the cash is not there to keep their promises, our government borrows money. Paying back this debt would require making extremely difficult decisions, and concurrently, losing votes. It is much easier to avoid this problem, kick the can down the road, and borrow from our children’s future than responsibly address it.

The politicians’ solution? Inflate our way out of the problem. The path of least resistance is to manufacture (read: print more) money to pay the debt back. By doing so, we are able to meet and satisfy our debt obligations (at least on paper). However, what this means is the holders of U.S. debt will receive back less than they loan in real dollars, as the purchasing power of a dollar declines as inflation occurs.

Most economists agree with and are untroubled by such massive amounts of borrowing, understanding our economy is currently in peril. The national debt was barely a concern when we passed the CARES Act, a cornerstone $2.2 trillion coronavirus economic stimulus bill, almost unanimously in March.

The two major concerns about carrying such a major debt load (higher interest rates and higher inflation) have not yet come to pass, as interest rates are extremely low and inflation remains quite muted. And because of that, our government is able to focus on providing the above-mentioned stimulus to combat the COVID-19 pandemic, and not have our national debt constrain our response. Seeing that we have been “forced” to borrow aggressively, at least we have been able to do so quite cheaply!

Make no mistake about it, questions remain about what the actual impact of this aggressive borrowing and economic stimulus will be. At Towerpoint Wealth, we believe the politics will eventually have to switch towards reining in the deficit. As this occurs, expect potentially massive implications for government spending, focused in areas like pension and medical spending, especially as our economy and our citizens age.

However, while we do feel there may be a transition to and an increased focus on debt reduction here in the United States at some point, the way we see it for the foreseeable future:

  1. The U.S. economic engine will remain a powerful one
  2. The urgency of the COVID-19 crisis will continue to underscore the demand for “safe haven” assets like U.S. Treasurys 
  3. The U.S. dollar will remain the world’s reserve currency
  4. The U.S. Federal Reserve will continue to print vast amounts of money to buy our debt
  5. Once business start to reopen and growth returns to more “normal” levels, tax revenues will increase substantially.

What’s Happening at TPW?

It was great to have a Towerpoint Wealth quorum downtown yesterday, with everyone looking good and dressed nicely to boot!

She said yes!

Our Partner, Wealth Manager, Jonathan LaTurner, *finally* popped the question to his long-time partner, Katie McDonald, while at Carmel by the Sea this past weekend.

A huge congratulations to both Jon and Katie, we can’t wait for your wedding!

TPW Service Highlight – Concentrated Stock Management

Have you amassed personal wealth through equity-based compensation, the inheritance of a large single-stock position, or from receiving stock as part of the sale of a closely-held business? Does this stock represent more than 10 or 15% of your overall portfolio? Do you recognize and are you concerned about the risk that this position may represent to your overall net worth? If the stock has appreciated, are you worried about the potential income and capital gains tax consequences of selling it?

We are experts in helping our clients manage and mitigate the risk and tax consequences of owning a concentrated stock position – click HERE or scroll to the bottom of this newsletter to download the white paper we recently published on this very important issue.

Graph of the Week

Researchers around the world are working around the clock to find a vaccine against COVID-19. In addition to a number of individual companies, the pandemic has created a number of unprecedented public/private partnerships in search of promising vaccine candidates:

  • BioNTech / Pfizer
  • Oxford / AstraZeneca
  • GSK / Sanofi
  • Novavax
  • Gamaleya Research Institute of Epidemiology and Microbiology
  • Moderna
  • Sinovac
  • Janssen
  • Valneva
  • CureVac

Below you will find a chart that outlines these current major partnerships and companies, as well as geographic distribution of the anticipated vaccine.

As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.

– Nathan, Raquel, Steve, Joseph, Lori, Jonathan, and Matt

Towerpoint Wealth Team : Sacramento Financial Advisor
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President Joseph Eschleman Cited As Expert

Our President, Joseph Eschleman, recently penned a white paper for Towerpoint Wealth that discussed 14 different strategies to consider during the coronavirus crisis. Joseph was cited as an expert by for his work and content on the subject, who published his commentary on their website on June 11.

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Steve Pitchford Cited As Expert, Published on

Our Director of Tax and Financial Planning, Steve Pitchford, recently penned a white paper for Towerpoint Wealth that focuses on strategies to manage the risk and income tax consequences of owing a concentrated stock position. Steve was cited as an expert by for his work and content on the subject, publishing his commentary on their website on June 11.