Executives often have a significant portion of their wealth in their company stock. For those still working, the risk is manageable, because they likely have holding requirements that must be met.
In those situations, we help clients track, report, and determine how to tax-efficiently manage their exposure to that amount.
For retiring or retired executives, or those who have more than their holding requirements, we work to determine how much, if any, they should continue to hold and how to tax-efficiently decrease their exposure as needed.
Sometimes, executives understandably resist reducing their exposure to company stock.
They have an emotional attachment to the company. Typically, they’ve worked there for years and know it well. It’s been good to them. Let’s also not forget the tax bill that will be generated from selling a highly appreciated investment.
Typically, these roadblocks can be overcome by taking a deep dive into the executive’s goals and tying their future investment strategy to those goals. Capturing all their goals is critical, because executives often want their wealth to support more than just their lifestyle. By fully understanding their goals, we can build financial plans and portfolio solutions that are intended to not only meet their security and lifestyle needs, but those items that are above and beyond their core needs, as well.
For personal security and lifestyle goals, we want to make sure there is a risk-managed, core portfolio, and/or income streams that meet those needs in the expected timeframes. Once the core portfolio is constructed, we can creatively consider how to support the “above and beyond” goals. Often, you can make a compelling case for selling company stock and investing in something different in an effort to meet these “above and beyond” goals.
Imagine an executive who wants to support economic growth and entrepreneurship in his or her community. Holding company stock doesn’t necessarily support that, but selling it and investing funds in a local startup or seed capital group does. This certainly comes with some additional risk, but increased risk also comes with the potential for increased return. And even if the investment doesn’t pan out, it still accomplishes the goal of supporting economic growth and entrepreneurship.
Or, how about an executive who grew up in the Midwest and wants to support agriculture? Maybe helping the executive purchase a piece of farm ground that produces cash rent and allows him or her to engage with a local farmer would be more meaningful.
If an executive’s desire is to support someone by funding their college education, it’s also unlikely company stock is the ideal investment to meet that goal. In this case, it makes more sense to sell the stock in order to build a portfolio that provides more certainty in producing cash-flows when they need to occur.
Often the tax bill on selling concentrated stock isn’t as bad as one might think.
Lastly, a note on taxes. The following four things can free an executive from being too bogged down by a tax bill:
- Long-term capital gain tax rates are usually 15% to 20%, federally, and only apply to the gain.
- Outside of gifting the appreciated stock or holding it until death, it’s often unlikely the executive will be able to avoid those rates in the future.
- Stock will generally need to be sold in the future to fund goals anyway.
- A different investment approach can often be a better fit for the executive’s goals.
If all those things are true, the case can usually be made for a quicker transition from company stock to another investment solution, one that is connected to their goals and, therefore, more enjoyable for the executive to own. At Foster Group, truly caring for our clients means taking the time to learn what’s in their hearts and using proven methods to help them pursue their goals. If you need help limiting your exposure to company stock or would like to discuss investments in general, please contact us. We’re here to help!
Foster Group is not engaged in the practice of law or accounting. All investment strategies have the potential for profit or loss.
