Unlock Hidden Value: How to Maximize Your Concentrated Stock

As a successful executive, you’ve likely accumulated a healthy number of shares of your company’s stock. While most wealth advisors (rightfully) warn against the inherent risk a single stock concentration presents, what if the reason to consider diversifying is tied to fulfilling other important goals?

The key to unlocking the hidden value in your company stock could lie in repurposing some of those funds to maximize what’s truly important to you, such as education for your children, a second home your family can enjoy, retirement security, or philanthropic desires.

If you’re on board with this thought process, your next question might be, “But how do I do that, particularly in a tax-efficient way?” While your choices can be complex and depend on your circumstances and tax situation, below are some common approaches and considerations to explore with your team of advisors, depending on your objective.

Objective: Creating Liquidity

• Selling Shares Outright
  Selling shares of stock frees up funds that can be used for just about any need. If you have a low cost basis though, you are likely concerned about a significant capital gains tax hit. One solution is to consider selling shares over time, which can help you mitigate the tax bite in any one year and still participate in the future growth of the stock you own.
• 10b5-1 Plan
  If you are an insider, establishing a 10b5-1 plan could define a predetermined schedule for selling shares over time. Such plans specify each sale’s dates, prices, and amounts before the transaction and comply with SEC Rule 144, which governs the sale of restricted stock.
• Using Listed Options
  Depending on your objective, several options strategies could be employed. Writing covered calls, purchasing put options, or creating a collar can create income while you’re waiting to sell, protect against downside price movements, or potentially both.
• Securities-based Loan / Line of Credit
  Exploring a securities-based loan is another strategy to look into if you need funds but the timing of unwinding the stock is not optimal. However, making sure you understand the risks involved is imperative. For example, adjustable interest rates, capital calls during market declines, or reduced borrowing capacity due to asset allocation changes should be carefully considered.

Objective: Managing Tax Implications

• Exchange Fund
  An exchange fund is a private placement limited partnership that pools shares you contribute to the fund with shares from other concentrated stock investors to create a diversified investment. After a set period (generally seven years), each exchange fund’s shareholders are entitled to a prorated portion of its portfolio. Taxes are postponed until you sell those shares, and you pay taxes on the difference between the value of the stock you contributed and the price received for your exchange fund shares. Though it provides no liquidity, an exchange fund may help minimize taxes while providing greater diversification when planning for long-term goals. Be sure to check the costs involved with an exchange fund and what other securities it holds.
• Direct Indexing
  Direct indexing is an automated investing strategy where an investment manager uses computer algorithms to buy all or a representative portion of the stocks you would generally own by purchasing an index fund in your account^[1]. The main aim of a direct indexing strategy is to lower your capital gains tax bill by harvesting losses throughout the year as company stock, sector, or overall market declines occur.
• Variable Prepaid Forward Contract
  A variable prepaid forward contract (VPFC) is a trading strategy that allows a shareholder to sell shares for future delivery in exchange for immediate cash. As the shareholder, you would receive cash without paying capital gains taxes and stock ownership transfers to the other party at the end of the contract term.
• 83(b) Election
  An 83(b) election allows you to make an election to be taxed on all your shares up front, even those that are unvested, in the tax year those shares are acquired. It also notifies the IRS that you have opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income.

Objective: Wealth Transfer & Philanthropy

• Gifting to Family
  Gifts can be made in cash, securities, or other assets. As long as the total market value of your gift does not exceed $18,000 per recipient in a calendar year, the transfer is tax-free. Any gift totaling over $18,000 will incur a gift tax. The donor is generally responsible for paying the gift tax. Under special arrangements, the gift recipient may agree to pay the tax instead.^[2]The Lifetime Gift Tax Exclusion is a credit that can be applied to the total value of gifts given during an individual’s lifetime. In 2024, the lifetime gift tax exclusion is $13.61 million. This means an individual can give gifts up to $13.61 million over their lifetime without paying any gift tax. (Note: this figure is set to sunset at the end of 2025.)
• Donor-advised Fund
  A donor-advised fund is a charitable investment account that allows you to contribute assets to a public charity while immediately receiving an upfront tax deduction. Delivering low-basis stock to one of these vehicles can be a home run if you’re charitably inclined. Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.^[3]
• Charitable Remainder Trust
  A charitable remainder trust (CRT) is an irrevocable trust that generates a potential income stream to you while the remainder of the donated assets go to your favorite philanthropic organizations. Typically, the trust can sell donated stock without paying capital gains taxes and reinvest the proceeds to provide you income for living expenses or other needs.

Conclusion

If you’ve been acquiring and holding company stock for several years, its growth has likely afforded you the opportunity of choice. Maximize its value by choosing to use it in a way that supports your financial, family, and charitable goals.

There are many methods to consider for unlocking its benefits, which can be categorized by whether liquidity, tax minimization, or wealth transfer is of prime importance. Of course, overarching investment, tax, and legal issues must also be considered. Consult professionals who can help you navigate your options.

We can help you determine how to accomplish your goals with concentrated stock.

1. https://www.wsj.com/buyside/personal-finance/direct-indexing-4b1563b7#:~:text=Direct%20indexing%20is%20an%20automated,your%20capital%2Dgains%20tax%20bill
2. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
3. https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-donor-advised-fund.html?immid=PCD&account=GOOGLE&campaign=Donor+Advised+Primer&adgroup=Donor+Advised_Donor+Advised+Fund+Tax&gad_source=1&gclid=CjwKCAjw9cCyBhBzEiwAJTUWNSYEiFkdyEcPn2SusKU7vocOUVg8V-zfuB19sSCaVFTGHijM7OzX4BoCa7UQAvD_BwE&gclsrc=aw.ds