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You might be an early Microsoft employee, tech company executive, or have been gifted shares of stock as a kid. You’d like to diversify, but the resulting tax bill seems almost as big as the portfolio itself! In this Stock Edition of our Strategic Guide to Highly Appreciated Assets, we’ll look at a case study and strategies to consider if you find yourself in this situation.

Here are links to our intro, business and real estate editions.

Here’s a common scenario. You’ve been awarded company stock as part of your compensation for years. You’ve watched it skyrocket recently and it now represents a large percentage of your investments. With the dramatic swings it takes from day to day, you’re now thinking about taking some risk off the table.

You have $1 million in company stock with a cost basis – the total amount you paid for the stock – of $300,000. With a $700,000 gain, you’re looking at a 20% tax bill of over $140,000 if you sell it all today.

What should you do? Here are a few strategies to consider for three common primary goals.

  1. Support your family during your life.
  2. Provide for your family after you’re gone.
  3. Maximize impact on causes you care about.

Goal 1 – Support my family during my life.

You’re counting on this to support you during retirement or for other goals requiring income while you’re alive. This stock will help create the future you’re excited about. So, the more tax you pay, the more of that dream you feel slipping through your fingers. What can you do?

  1. Use tax-loss harvesting, selling stocks with a loss to offset your gain thereby reducing taxes, to diversify over time without taking a big tax hit all at once.
  2. Write options against the stock to create income without having to sell the shares. You risk the shares being called away if the stock price goes above the option price, but the income can help pay the tax bill and make it a little less painful.

Goal 2 – Provide for my family after I’m gone.

This stock might fund years of college for generations of your family, help start small businesses or a variety of other goals. In any case, you want to make sure it’s there for them and not lost to taxes that could have been prevented.

  1. Do nothing. Unless you’re expecting high estate taxes – your financial team can advise you on this – leaving the stock directly to your kids can be a great option. They will typically receive a step-up in cost basis at your death and sell the shares without the capital gains tax you would have incurred.
  2. Gift shares to kids in low tax brackets. You’ll need to know their tax bracket, which can make this tough, but if your adult children are in one of the lowest tax brackets then they could pay 0% capital gains taxes.

Goal 3 – Maximize impact on causes I care about.

You’ve met the needs of yourself and your family. Now, your focus has shifted to organizations tackling some of the world’s biggest challenges, and you want this stock to provide resources to help people in need.

  1. Gift shares to a Donor Advised Fund. This allows you to give the shares to your favorite charity without paying any capital gains taxes. Rather than selling, paying capital gain tax, and giving the remainder, the charity receives the full value of the stock and you get a bigger tax deduction. 
  2. Transfer shares to a Charitable Remainder Trust (CRT). This creates a sizable tax deduction and allows you to sell the stock and diversify without paying the capital gains taxes. You can take income from the trust while you’re alive, with the remainder going to charity when you die. If you don’t need the income then you can give that away, too, or fund a Wealth Replacement Trust (WRT) for the benefit of the kids/grand kids to replace the inheritance they otherwise would have received from the stock.
  3. To increase impact on your other goals, convert taxable 401(k)s or IRAs to a tax-free Roth IRA and use these charitable tax deductions to offset taxes you’d otherwise pay on the conversion. You’ll reduce your retirement tax bill or leave a tax-free gift to the kids.

As with any strategies you’re considering, you should review these suggestions with your advisors to see if they fit in your overall plan. With a coordinated financial plan built to enjoy life, provide for loved ones, and impact causes you care about, you’ll experience the joy of knowing your legacy will last well beyond your lifetime.

Alterra Advisors - Josh Whelan

Zach Hamilton

Financial Advisor

About the Author

Zach graduated from Gonzaga University with degrees in Marketing and Finance. While growing up, Zach heard stories from his grandfather about his work as an insurance agent, and other stories from his dad who was an investment manager. They both spoke financial “languages” but had completely different dialects. Recognizing the breadth of the financial vocabulary ultimately led to Zach’s passion for financial planning. He credits his family for this enthusiasm. Zach sees his time with clients as an opportunity to translate all of the different – and often confusing – information they’ve heard and provide clear guidance for each unique situation.

Zach enjoys working with people – his clients – who also appreciate that their financial decisions have an impact not just on themselves, but also on their families, charities and their own life legacy. Many of Zach’s clients have a strong desire to “make a difference”, and they rely on his financial expertise to magnify their philanthropic goals.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.