September 29, 2025 • 29 mins
In this episode of Something More with Chris Boyd, Jeff Perry, and Russ Ball join Chris
to tackle the challenges of concentrated stock positions and embedded capital gains.
Whether it is legacy shares, inherited assets, or long-held business equity, these situations
can create significant tax and portfolio risk. The team explores smart strategies to manage
exposure, reduce volatility, and navigate tax implications without necessarily selling.
This episode is a must-listen for investors facing concentrated positions or advisors
helping clients preserve wealth while minimizing tax burdens.
For more information or to reach TEAM AMR, click the following link:
https://www.wealthenhancement.com/s/advisor-teams/amr
#CapitalGains #ConcentratedStock #TaxPlanning #InvestmentStrategy #PortfolioRisk
#WealthManagement #FinancialPlanning #EstateStrategy #OptionsHedging
#AssetAllocation
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to Something More with Chris Boyd.
Chris Boyd is a Certified Financial Planner Practitioner
and Senior Vice President and Financial Advisor at
Wealth Enhancement Group, one of the nation's largest
registered investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome to Something More with Chris Boyd.
I'm here with Jeff Perry and Russ Ball.
We are all of the AMR team at
Wealth Enhancement and glad to have you with
us.
Today, we are talking about concentrated stock or
(00:46):
actually, I think we could even extend this
to circumstances where you have embedded capital gains,
high capital gains concerns, and how do you
navigate those?
And what are some techniques that we can
try to help you think about that?
We tend to see this often when people
have a long-term legacy position in a
(01:08):
stock.
Maybe they inherited it and have had it
for years.
Maybe they worked in an industry and had
a stock in that instance.
It could be, and in other instances, we've
even seen like real estate or other types
of assets that have a lot of embedded,
a business or whatever, they have a lot
(01:30):
of embedded capital gain.
And so how do you navigate trying to
reduce that capital gains exposure or limit the
risks when you have a concentrated stock?
So there's different types of approaches and different
ways we can navigate that.
So let's talk about these a little bit.
(01:54):
I was thinking, Russ, we've seemed like we
keep running into this recently.
What are some of the techniques that come
to mind?
Yeah.
Well, I think when people start off with
either concentrated in one position, like you said,
or just legacy stocks that have been held
over a long period of time since the
(02:16):
90s or whatever, the question is, what do
you do?
How do you manage around that?
And I think that's probably the most conservative
option.
We've been talking about concentrated stock recently.
The most conservative option would be to manage
what you can around those positions.
But I don't want to sell them.
(02:37):
I don't want to pay taxes.
Yeah, that's a great point.
So if I don't want to sell this
position, well, first off, it's important to recognize,
depending on the amount of scale, like how
much we're in a particular position, this can
add a magnitude of risk.
So we generally think in terms of guidance
(02:58):
for people to think around 5% of
your investment portfolio in any one name, you
get beyond that, you're starting to get to
a point where you have more risk.
Even if it's maybe 10%, it might depend
on the stock, the kind of company it
is, but how diversified within the company.
(03:19):
You might have multiple companies, different areas of
business within it.
Berkshire Hathaway.
Berkshire Hathaway is a good example.
Procter & Gamble, something like that.
It's many companies all in one stock.
So that kind of thing, that's a good
example.
But even so, we typically would say if
it's getting beyond that 5% range, we're
(03:41):
getting extra magnitude of risk built into the
portfolio.
And so that's where we start to get
nervous.
So the one way we can try to
manage the risk is by looking at the
asset allocation.
What's our overall allocation?
And if we can, maybe there's places that
we can reduce our overall exposure to risk,
(04:03):
volatility, stock in this case.
So we have had occasion where we talked
about asset location.
If we make those changes in our taxable
accounts, well, there might be some tax consequences.
But if we have non-taxable accounts or
tax deferred, let's say, IRAs, 401ks, certainly Roth
(04:29):
IRA too, but we tend to like to
keep that for growth if we can.
But these might be places where we could
make a change, or if you had annuity
assets.
These might be places where you could rearrange
the allocation of what kind of investments you
own without a tax consequence.
And you might be able to scale up
(04:50):
the lower risk investments as a starting point
without any tax consequence.
So that's maybe step one.
That's what you're driving at?
Yeah, exactly.
To take a look at everything else.
And if you're, for whatever reason, locked into
that position, either you have a lot of
conviction, you're extremely attached to that position because
(05:13):
that does happen.
It's not always the best.
That's probably not what we would prefer to
have a sentimental attachment to specific positions, but
it does happen.
And I think another piece is, yes, on
the asset allocation side to try to reduce
risk in other areas, but also reducing risk
(05:34):
away from that specific sector.
So if it's a tech stock that this
individual might have or whatever it may be,
you can- Well, we have an example
of an older gentleman who has telecom stocks.
They've had- Acquired them through a ESOP,
an employee.
(05:55):
Or inherited or whatever.
Either way, they got them.
I was talking with a client recently where
they went through the breakup and now come
back together.
They've been round trip on their telecom stocks.
So the basis on these is nil.
(06:17):
And on the one hand, you'd say, well,
maybe I'd rather just hold onto it until
I pass away because there's a step up
in basis for my heirs.
But there's also this, we're missing out on
opportunity because the performance of these stocks isn't
as good.
(06:38):
The dividend is nice, but the overall performance
has been subpar.
So maybe how old I am is part
of this equation, right?
We have a case where we're dealing with
a family who has the owner is in
his 90s, I want to say, and some
(07:01):
legacy stocks.
Well, I get why.
So how do we, in that case, maybe
it's more about how do we mitigate risk?
In some cases, it might be, where can
we make some changes?
There might be some low hanging fruit.
Some of these stocks may actually be worth
less than what they have as basis.
(07:24):
And there can be opportunities to do some
offsetting of capital gains with capital losses.
But for example, if you owned, just as
an example, if you own GE in the
90s or the early 2000s, and it's seen
drastic changes in the way GE is structured
(07:46):
and priced and so forth, you might actually
have a capital loss in your mix to
draw from.
And that could work against something else that
you have as a big long-term capital
gain, as an example.
So in any case, but if we've got
instances where we might have something we would
(08:08):
like to try to hold on to because
we'd rather have the step up in basis,
what's a way we might be able to
navigate the risks?
Perhaps an option strategy could be a consideration.
You want to talk about that, Russ?
Yeah.
So especially if you have one stock or
(08:31):
a concentrated group of stocks, but really it
works best, I think, if we're talking about
one specific stock.
A single position that's concentrated.
Yep.
If you say, this stock has done really
well, I'm worried about how it's going to
affect my overall portfolio if that stock plummets
tomorrow.
Because I've got such a large concentration in
(08:51):
this one company.
Yeah.
So yeah.
Go ahead.
Yeah.
Just that there are ways we can use
an option strategy to hedge against that downside
risk.
So you'd basically be buying a put and
I'll let you...
Yeah.
So I'll take on this.
(09:12):
So I think we don't need to get
too into the weeds on this.
I think most people would say, options?
I don't want to have risk.
I'm trying to reduce my risk.
And options sounds like, because of what we
hear from people, oftentimes options are used for
leverage to give me enhanced risk, but to
(09:32):
try to get more juice in a portfolio.
That's not what we're talking about here.
Well, one of the ways options can be
used is to mitigate downside risk.
Think like an insurance policy.
I can pay a premium, buy an insurance
policy to mitigate my downside.
And essentially, I might still have some downside,
(09:52):
but I might be able to say, I
want to put a floor on that downside.
And usually when we do these approaches, so
we're buying, we're paying a premium for that
to protect that downside, but we might also
sell an option to cap our upside so
that it will help to pay for this
insurance.
(10:14):
And when we use a team that does
this exclusively, oftentimes they can manage this in
a way where we can try to avoid
having an actual transaction occur.
They can get rid of the contracts, roll
the contracts and just keep moving the expiration
(10:35):
date further down the line to avoid any
kind of experience where we have to sell
the security that we really don't want to
sell for a tax purpose.
So that's one possible way is this involved,
but sophisticated way of mitigating risk through the
(10:58):
use of options as a way to limit
downside exposure.
And it's important to recognize when you buy
insurance, there's usually a premium involved.
So there is some cost oftentimes when you're
doing this.
You can mitigate some of that cost and
make it more manageable and not so painful
(11:20):
in the process.
But I think we probably overlooked the first
and most obvious choice of when you have
this issue.
If you've got concentrated stock, you don't really
want to pay the tax.
But in some cases, we've had clients and
friends who've had a concentrated position, had a
(11:45):
huge run up, felt great, made a lot
of money, but I don't want to pay
that tax.
And they chose not to.
Well, and the good news is the stock
has changed in price and they don't have
a capital gains tax anymore, but that's not
(12:06):
always the good news.
That's bad news too, that the price has
changed.
So sometimes it's worth biting the bullet, just
recognizing you don't own all the value of
that stock.
Uncle Sam's got a claim on some of
the gain.
And so many people put the primary decision
as the tax consequence of whether or not
(12:29):
to sell an investment.
And that's a factor, but it's really not
the most important factor.
The most important factor from my perspective is
what's the outlook for the stock?
Is it in a growing industry?
Are their earnings good?
Is the company being managed right?
Is it in the right sector?
(12:50):
Where are we in the business cycle?
All these things that Brian and you do,
Chris, when you're analyzing a stock, either fundamentally
or technically, but that should be question one.
I own this stock.
Is the future of the stock positive?
That's a whole different analysis than holding some
old industrial company because you've got a large
(13:13):
capital gain that's in a business that is
questionable for the future.
We had a conversation with someone who thinks
the company is great that they have a
concentrated position in, but they think it's kind
of had a good run and maybe it's
a little overpriced right now.
What if you're someone else who says, well,
it's not the stock I don't like.
I think we're poised for a downturn with
(13:34):
the markets or the economy.
We're in a position where the outlook isn't
as good.
Or even the sector, right?
Or the sector, right?
So those are all variables that make it
more difficult to navigate.
On the one hand, I want to say,
one of the options is you could sell.
(13:55):
It's painful.
Nobody likes taxes, but on some level, historically,
taxes are relatively inexpensive today.
That's a good point too, right?
It may not be a bad thing to
consider.
All right.
So that's one option.
And not an all or nothing proposition too.
Absolutely right.
All right.
So that's one option.
(14:16):
We have a gentleman who has capital gains
from real estate that they're dealing with.
And we're trying to navigate that.
Let's talk about the idea of how do
we try to manage capital gains through the
try to create a mechanism where we can
(14:36):
generate intentionally, generate capital losses.
So this is another possibility.
You want to start and I'll jump in?
Yeah.
Well, I think it's important to remember that
capital gains and losses are not just in
your stock portfolio.
They're also, like you said, if you're selling
a business, if you're selling a home, capital
(14:57):
gains- Like a rental property or like
an investment property type of- Yeah.
I mean, or your own property.
Yeah.
I guess it's after a certain amount of
gain.
Right.
Depending on the value, right?
Yeah.
So those gains, they're still capital gains when
you sell a house and they could be
offset by losses in your stock portfolio because
those are capital losses.
(15:18):
So one option is, it can get a
little bit into the weeds to go into
the details, but it's based on a direct
indexing sort of approach.
And direct indexing basically is you look at
a portfolio like the S&P 500 and
rather than buying a mutual fund or ETF
(15:39):
that contains all of it in one security,
you're saying, I'm going to break that up.
I'm going to buy a number, a hundreds
sometimes of those stocks in the portfolio.
Yeah.
So it moves in a way that's similar
to that index.
But in the midst of that, with all
these individual positions, some of them go down.
(16:01):
And we could replace those positions that went
down with something that's very similar.
So we'll stay invested in a way that
it still continues to look like the index,
but I can capture all these little moves
on the downside to benefit from that capital
(16:25):
loss, that decline in value for a small
piece of the mix and harvest that to
help me manage gains that I have to
deal with elsewhere.
And in some instances, we might even leverage
that where we have a long short strategy
paired with that, where we're going to put
(16:48):
a little bit more exposure on top and
below, where if we're buying long and selling
short, and if the market goes up, well,
one portion of that is going to make
money, but another portion of that is going
to lose money.
The short portion would have losses.
(17:09):
If we see the market go down, well,
the long portion has losses, but the short
portion will have made money.
So we're neutral to what happens in the
market because we've got long and short, but
invariably, some portion of that will give us
an opportunity to harvest losses.
(17:33):
And we can use that in a way
to try to capture some tax benefit now
and use that as a way to help
to offset that gain.
We might be dealing with that real estate,
or in the case of the concentrated position,
(17:53):
we might be able to sell some holdings
to help mitigate that risk, that tax, and
to diversify from the risk that we have
in the concentrated stock.
And one additional benefit is that when you
generate those losses, let's say you get into
one of these strategies and the market starts
going down right away, you start racking up
(18:15):
losses, it's not going to feel great because
you're kind of going along the ride with
the market, but you're also generating losses that
you can carry forward year after year, as
long as you live, really.
Yeah, we have someone who has this kind
of a circumstance with a future sale of
an appreciated asset.
(18:35):
It's not today, but they know they're thinking
of selling this appreciated asset and want to
be prepared for the future gains.
So they're locking in losses to sort of
capture those so that then they just stay.
You get to deduct $3,000 a year,
(18:58):
so they might diminish a little bit over
time, but you've banked those losses so you
can use them against future gains, and it's
another date down the road.
So that can also be, with some forethought,
some time to prepare, you can be better
situated for when you have that.
So it's an unusual thought process.
(19:19):
I think sometimes we talk about capturing losses
and harvesting losses, and people think, why would
you want to have losses?
You don't necessarily want to have losses.
But in this case, we can intentionally set
out to manipulate the structure of things so
(19:40):
that we can gather those losses to help
offset taxes.
And that is another form of return.
It's not what you make, it's what you
keep.
So this helps us to have what they
call tax alpha.
We're going to have some added benefit and
have a better effective outcome because of trying
(20:02):
to mitigate some of that tax burden.
And it may be that we still have
some tax burden down the road, but in
the case of, say, the concentrated position or
the instance of the real estate that we're
trying to avoid a tax on, this gives
us the opportunity to push that problem down
(20:23):
the road a little bit.
And in the case of some of these,
it gives us more opportunity for more diversification,
which may be...
That's what I was going to comment on,
that you're doing that strategy in the context
of a broad-based index situation.
So you're, in essence, have that diversification, not
only by company, but also by sector and
(20:44):
so forth.
So you're not trying to pick winners and
losers.
You're doing it in a context of what
a lot of people like to do is
invest in index.
Yeah.
And there's a certain efficiency there.
But in our case, what we're really just
trying to do is diminish risk.
And that can give us a way to
(21:04):
effectively accomplish that.
So there are other techniques that are even
more involved and sophisticated that maybe go beyond
the scope of a program like this.
But I think it's important to just recognize
that this is a challenge that people...
It's not unique to have this difficulty of
(21:27):
either a long-held stock position, even if
it's inherited, maybe inherited from a parent or
something.
And this is very common.
People have stuff, they just hold onto it
and never change it.
And then now, 20 years later or whatever
it might be, you're faced with, oh, maybe
(21:49):
I should think about my investments in a
strategy that's appropriate for me.
What should I do?
And there's all this embedded tax concern.
So that's not unusual.
It's not unusual for people to have stock
maybe from an employer, maybe to have real
(22:11):
estate that's appreciated, a business that's appreciated.
And having the reality that we've got a
gain that we're going to be faced with,
how do we manage that gain and try
to offset some of that gain through the
use of a technique like this to help
(22:31):
diminish capital gains exposure by capturing losses along
the way or by mitigating the risk through
the use of options as a way to
navigate that.
Or just looking at your overall portfolio and
looking at where there are places where we
can do some changes without some tax burden
(22:53):
to help manage risk.
There's a variety of things to look at.
It's best done in the context of a
financial plan.
Is that where you're going?
Absolutely.
No, I was just going to say that
it's also not like you have to choose
one solution and go with that.
We try to take a look at it
all within that financial plan context as well.
(23:14):
But we look at the whole picture and
we decide, all right, here's what we're going
to do with this piece.
Here's what we would do with this piece.
And maybe some hedging, some tax loss harvesting,
rather than it all being in one specific
strategy.
I remember a couple of clients we've worked
with years past where we had this issue,
(23:34):
appreciated assets, but we also had the desire
for income over a lifetime.
And in some instances, some charitable intentions.
Sometimes people prioritize charitable intent and other times
(23:54):
people just prioritize mitigating, avoiding capital gains.
We talk about a charitable remainder trust, also
known as a capital gains avoidance trust.
It's really more of a, it's not avoidance,
but you're not getting hit with it all
at once.
It's a graduate, you can push it off.
(24:15):
But the idea of taking some position that's
concentrated with a lot of capital gains in
it, we've done this a number of times
where people have donated that stock to this
charitable intention eventually, but get a charitable deduction
(24:38):
right up front.
So some immediate tax benefit and the ability
to then derive income.
We can reposition in the trust that stock
into something that's more diversified and more balanced
and structure it where they can generate a
cashflow from this for themselves, for themselves and
(24:58):
a spouse.
We have one woman who did it with
herself, her spouse, and her sibling.
So as long as any one of them
is alive and their assets remain in the
trust that there's still presumably going to outlive
them all, there's income stream provided to them.
(25:19):
And there's different ways to structure a charitable
remainder trust.
One that's geared to try to maximize income
to the family, the donors, the beneficiaries, but
there's also some that are more regimented, but
can have more growth so that there's more
for the charitable intentions later on.
(25:41):
So depending on what we're trying to do,
there's ways to structure that.
There are other techniques as well that are
state planning techniques.
I think I mentioned one to you.
I didn't even remember now what it was.
Do you remember what my brother mentioned something
to me just today?
I'll look it up.
(26:03):
And that may be something we want to
look into for people as well in their
estate planning, but a deferred sales trust is
another technique he was talking about.
So the estate planning can provide some interesting
opportunities as well that we can try to
collaborate with all these various ways of trying
to manage how best to handle these appreciated
(26:26):
assets.
And the time horizon involved is certainly relevant.
It might be.
The solution or the mitigation of these taxes
may be a multi-year approach.
Yeah, yeah, exactly.
Good point.
And so let's just kind of wind it
down to say that this is all best
(26:47):
done in the context of a financial plan.
So we know how all the pieces fit
together.
We can think about estate planning considerations and
charitable giving considerations.
Think about some of these techniques we've just
elaborated on and the context of the portfolio,
how the rest of all those pieces fit
(27:08):
together.
If you're faced with some of these kinds
of issues, you're not alone.
There's lots of people who have similar kind
of challenges and a little bit of planning
can go a long way and helping you
to navigate that tax cost.
Russ and I were just talking last night
and saying, it seems like tax priorities, tax
(27:28):
issues, it's more on people's minds today than
ever before.
How do I navigate and manage my expenses
when it comes to tax costs as part
of my investment strategies?
It's probably more than ever on people's minds.
There are some great resources and techniques.
(27:52):
And if you need help navigating how that
works for you, give us a call, reach
out.
Don't hesitate to try to see if we
can be a resource in helping you figure
out what's the best path forward, not only
for your portfolio, but for your overall life
circumstances for your financial plan.
So with that, thanks for being with us.
(28:13):
And if any way we can be of
help, reach out.
Until next time, keep striving for something more.
(28:45):
AMR-info at wealthenhancement.com.
You're listening to something more with Chris Boyd
Financial Talk Show.
Wealth Enhancement Advisory Services and Jay Christopher Boyd
provide investment advice on an individual basis to
clients only.
Proper advice depends on a complete analysis of
all facts and circumstances.
The information given on this program is general
financial comments and cannot be relied upon as
pertaining to your specific situation.
(29:06):
Wealth Enhancement Group cannot guarantee that using the
information from this show will generate profits or
ensure freedom from loss.
Listeners should consult their own financial advisors or
conduct their own due diligence before making any
financial decisions.
Welcome to Something More with Chris Boyd.
Chris Boyd is a Certified Financial Planner Practitioner
and Senior Vice President and Financial Advisor at
Wealth Enhancement Group, one of the nation's largest
registered investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome to Something More with Chris Boyd.
I'm here with Jeff Perry and Russ Ball.
We are all of the AMR team at
Wealth Enhancement and glad to have you with
us.
Today, we are talking about concentrated stock or
(00:46):
actually, I think we could even extend this
to circumstances where you have embedded capital gains,
high capital gains concerns, and how do you
navigate those?
And what are some techniques that we can
try to help you think about that?
We tend to see this often when people
have a long-term legacy position in a
(01:08):
stock.
Maybe they inherited it and have had it
for years.
Maybe they worked in an industry and had
a stock in that instance.
It could be, and in other instances, we've
even seen like real estate or other types
of assets that have a lot of embedded,
a business or whatever, they have a lot
(01:30):
of embedded capital gain.
And so how do you navigate trying to
reduce that capital gains exposure or limit the
risks when you have a concentrated stock?
So there's different types of approaches and different
ways we can navigate that.
So let's talk about these a little bit.
(01:54):
I was thinking, Russ, we've seemed like we
keep running into this recently.
What are some of the techniques that come
to mind?
Yeah.
Well, I think when people start off with
either concentrated in one position, like you said,
or just legacy stocks that have been held
over a long period of time since the
(02:16):
90s or whatever, the question is, what do
you do?
How do you manage around that?
And I think that's probably the most conservative
option.
We've been talking about concentrated stock recently.
The most conservative option would be to manage
what you can around those positions.
But I don't want to sell them.
(02:37):
I don't want to pay taxes.
Yeah, that's a great point.
So if I don't want to sell this
position, well, first off, it's important to recognize,
depending on the amount of scale, like how
much we're in a particular position, this can
add a magnitude of risk.
So we generally think in terms of guidance
(02:58):
for people to think around 5% of
your investment portfolio in any one name, you
get beyond that, you're starting to get to
a point where you have more risk.
Even if it's maybe 10%, it might depend
on the stock, the kind of company it
is, but how diversified within the company.
(03:19):
You might have multiple companies, different areas of
business within it.
Berkshire Hathaway.
Berkshire Hathaway is a good example.
Procter & Gamble, something like that.
It's many companies all in one stock.
So that kind of thing, that's a good
example.
But even so, we typically would say if
it's getting beyond that 5% range, we're
(03:41):
getting extra magnitude of risk built into the
portfolio.
And so that's where we start to get
nervous.
So the one way we can try to
manage the risk is by looking at the
asset allocation.
What's our overall allocation?
And if we can, maybe there's places that
we can reduce our overall exposure to risk,
(04:03):
volatility, stock in this case.
So we have had occasion where we talked
about asset location.
If we make those changes in our taxable
accounts, well, there might be some tax consequences.
But if we have non-taxable accounts or
tax deferred, let's say, IRAs, 401ks, certainly Roth
(04:29):
IRA too, but we tend to like to
keep that for growth if we can.
But these might be places where we could
make a change, or if you had annuity
assets.
These might be places where you could rearrange
the allocation of what kind of investments you
own without a tax consequence.
And you might be able to scale up
(04:50):
the lower risk investments as a starting point
without any tax consequence.
So that's maybe step one.
That's what you're driving at?
Yeah, exactly.
To take a look at everything else.
And if you're, for whatever reason, locked into
that position, either you have a lot of
conviction, you're extremely attached to that position because
(05:13):
that does happen.
It's not always the best.
That's probably not what we would prefer to
have a sentimental attachment to specific positions, but
it does happen.
And I think another piece is, yes, on
the asset allocation side to try to reduce
risk in other areas, but also reducing risk
(05:34):
away from that specific sector.
So if it's a tech stock that this
individual might have or whatever it may be,
you can- Well, we have an example
of an older gentleman who has telecom stocks.
They've had- Acquired them through a ESOP,
an employee.
(05:55):
Or inherited or whatever.
Either way, they got them.
I was talking with a client recently where
they went through the breakup and now come
back together.
They've been round trip on their telecom stocks.
So the basis on these is nil.
(06:17):
And on the one hand, you'd say, well,
maybe I'd rather just hold onto it until
I pass away because there's a step up
in basis for my heirs.
But there's also this, we're missing out on
opportunity because the performance of these stocks isn't
as good.
(06:38):
The dividend is nice, but the overall performance
has been subpar.
So maybe how old I am is part
of this equation, right?
We have a case where we're dealing with
a family who has the owner is in
his 90s, I want to say, and some
(07:01):
legacy stocks.
Well, I get why.
So how do we, in that case, maybe
it's more about how do we mitigate risk?
In some cases, it might be, where can
we make some changes?
There might be some low hanging fruit.
Some of these stocks may actually be worth
less than what they have as basis.
(07:24):
And there can be opportunities to do some
offsetting of capital gains with capital losses.
But for example, if you owned, just as
an example, if you own GE in the
90s or the early 2000s, and it's seen
drastic changes in the way GE is structured
(07:46):
and priced and so forth, you might actually
have a capital loss in your mix to
draw from.
And that could work against something else that
you have as a big long-term capital
gain, as an example.
So in any case, but if we've got
instances where we might have something we would
(08:08):
like to try to hold on to because
we'd rather have the step up in basis,
what's a way we might be able to
navigate the risks?
Perhaps an option strategy could be a consideration.
You want to talk about that, Russ?
Yeah.
So especially if you have one stock or
(08:31):
a concentrated group of stocks, but really it
works best, I think, if we're talking about
one specific stock.
A single position that's concentrated.
Yep.
If you say, this stock has done really
well, I'm worried about how it's going to
affect my overall portfolio if that stock plummets
tomorrow.
Because I've got such a large concentration in
(08:51):
this one company.
Yeah.
So yeah.
Go ahead.
Yeah.
Just that there are ways we can use
an option strategy to hedge against that downside
risk.
So you'd basically be buying a put and
I'll let you...
Yeah.
So I'll take on this.
(09:12):
So I think we don't need to get
too into the weeds on this.
I think most people would say, options?
I don't want to have risk.
I'm trying to reduce my risk.
And options sounds like, because of what we
hear from people, oftentimes options are used for
leverage to give me enhanced risk, but to
(09:32):
try to get more juice in a portfolio.
That's not what we're talking about here.
Well, one of the ways options can be
used is to mitigate downside risk.
Think like an insurance policy.
I can pay a premium, buy an insurance
policy to mitigate my downside.
And essentially, I might still have some downside,
(09:52):
but I might be able to say, I
want to put a floor on that downside.
And usually when we do these approaches, so
we're buying, we're paying a premium for that
to protect that downside, but we might also
sell an option to cap our upside so
that it will help to pay for this
insurance.
(10:14):
And when we use a team that does
this exclusively, oftentimes they can manage this in
a way where we can try to avoid
having an actual transaction occur.
They can get rid of the contracts, roll
the contracts and just keep moving the expiration
(10:35):
date further down the line to avoid any
kind of experience where we have to sell
the security that we really don't want to
sell for a tax purpose.
So that's one possible way is this involved,
but sophisticated way of mitigating risk through the
(10:58):
use of options as a way to limit
downside exposure.
And it's important to recognize when you buy
insurance, there's usually a premium involved.
So there is some cost oftentimes when you're
doing this.
You can mitigate some of that cost and
make it more manageable and not so painful
(11:20):
in the process.
But I think we probably overlooked the first
and most obvious choice of when you have
this issue.
If you've got concentrated stock, you don't really
want to pay the tax.
But in some cases, we've had clients and
friends who've had a concentrated position, had a
(11:45):
huge run up, felt great, made a lot
of money, but I don't want to pay
that tax.
And they chose not to.
Well, and the good news is the stock
has changed in price and they don't have
a capital gains tax anymore, but that's not
(12:06):
always the good news.
That's bad news too, that the price has
changed.
So sometimes it's worth biting the bullet, just
recognizing you don't own all the value of
that stock.
Uncle Sam's got a claim on some of
the gain.
And so many people put the primary decision
as the tax consequence of whether or not
(12:29):
to sell an investment.
And that's a factor, but it's really not
the most important factor.
The most important factor from my perspective is
what's the outlook for the stock?
Is it in a growing industry?
Are their earnings good?
Is the company being managed right?
Is it in the right sector?
(12:50):
Where are we in the business cycle?
All these things that Brian and you do,
Chris, when you're analyzing a stock, either fundamentally
or technically, but that should be question one.
I own this stock.
Is the future of the stock positive?
That's a whole different analysis than holding some
old industrial company because you've got a large
(13:13):
capital gain that's in a business that is
questionable for the future.
We had a conversation with someone who thinks
the company is great that they have a
concentrated position in, but they think it's kind
of had a good run and maybe it's
a little overpriced right now.
What if you're someone else who says, well,
it's not the stock I don't like.
I think we're poised for a downturn with
(13:34):
the markets or the economy.
We're in a position where the outlook isn't
as good.
Or even the sector, right?
Or the sector, right?
So those are all variables that make it
more difficult to navigate.
On the one hand, I want to say,
one of the options is you could sell.
(13:55):
It's painful.
Nobody likes taxes, but on some level, historically,
taxes are relatively inexpensive today.
That's a good point too, right?
It may not be a bad thing to
consider.
All right.
So that's one option.
And not an all or nothing proposition too.
Absolutely right.
All right.
So that's one option.
(14:16):
We have a gentleman who has capital gains
from real estate that they're dealing with.
And we're trying to navigate that.
Let's talk about the idea of how do
we try to manage capital gains through the
try to create a mechanism where we can
(14:36):
generate intentionally, generate capital losses.
So this is another possibility.
You want to start and I'll jump in?
Yeah.
Well, I think it's important to remember that
capital gains and losses are not just in
your stock portfolio.
They're also, like you said, if you're selling
a business, if you're selling a home, capital
(14:57):
gains- Like a rental property or like
an investment property type of- Yeah.
I mean, or your own property.
Yeah.
I guess it's after a certain amount of
gain.
Right.
Depending on the value, right?
Yeah.
So those gains, they're still capital gains when
you sell a house and they could be
offset by losses in your stock portfolio because
those are capital losses.
(15:18):
So one option is, it can get a
little bit into the weeds to go into
the details, but it's based on a direct
indexing sort of approach.
And direct indexing basically is you look at
a portfolio like the S&P 500 and
rather than buying a mutual fund or ETF
(15:39):
that contains all of it in one security,
you're saying, I'm going to break that up.
I'm going to buy a number, a hundreds
sometimes of those stocks in the portfolio.
Yeah.
So it moves in a way that's similar
to that index.
But in the midst of that, with all
these individual positions, some of them go down.
(16:01):
And we could replace those positions that went
down with something that's very similar.
So we'll stay invested in a way that
it still continues to look like the index,
but I can capture all these little moves
on the downside to benefit from that capital
(16:25):
loss, that decline in value for a small
piece of the mix and harvest that to
help me manage gains that I have to
deal with elsewhere.
And in some instances, we might even leverage
that where we have a long short strategy
paired with that, where we're going to put
(16:48):
a little bit more exposure on top and
below, where if we're buying long and selling
short, and if the market goes up, well,
one portion of that is going to make
money, but another portion of that is going
to lose money.
The short portion would have losses.
(17:09):
If we see the market go down, well,
the long portion has losses, but the short
portion will have made money.
So we're neutral to what happens in the
market because we've got long and short, but
invariably, some portion of that will give us
an opportunity to harvest losses.
(17:33):
And we can use that in a way
to try to capture some tax benefit now
and use that as a way to help
to offset that gain.
We might be dealing with that real estate,
or in the case of the concentrated position,
(17:53):
we might be able to sell some holdings
to help mitigate that risk, that tax, and
to diversify from the risk that we have
in the concentrated stock.
And one additional benefit is that when you
generate those losses, let's say you get into
one of these strategies and the market starts
going down right away, you start racking up
(18:15):
losses, it's not going to feel great because
you're kind of going along the ride with
the market, but you're also generating losses that
you can carry forward year after year, as
long as you live, really.
Yeah, we have someone who has this kind
of a circumstance with a future sale of
an appreciated asset.
(18:35):
It's not today, but they know they're thinking
of selling this appreciated asset and want to
be prepared for the future gains.
So they're locking in losses to sort of
capture those so that then they just stay.
You get to deduct $3,000 a year,
(18:58):
so they might diminish a little bit over
time, but you've banked those losses so you
can use them against future gains, and it's
another date down the road.
So that can also be, with some forethought,
some time to prepare, you can be better
situated for when you have that.
So it's an unusual thought process.
(19:19):
I think sometimes we talk about capturing losses
and harvesting losses, and people think, why would
you want to have losses?
You don't necessarily want to have losses.
But in this case, we can intentionally set
out to manipulate the structure of things so
(19:40):
that we can gather those losses to help
offset taxes.
And that is another form of return.
It's not what you make, it's what you
keep.
So this helps us to have what they
call tax alpha.
We're going to have some added benefit and
have a better effective outcome because of trying
(20:02):
to mitigate some of that tax burden.
And it may be that we still have
some tax burden down the road, but in
the case of, say, the concentrated position or
the instance of the real estate that we're
trying to avoid a tax on, this gives
us the opportunity to push that problem down
(20:23):
the road a little bit.
And in the case of some of these,
it gives us more opportunity for more diversification,
which may be...
That's what I was going to comment on,
that you're doing that strategy in the context
of a broad-based index situation.
So you're, in essence, have that diversification, not
only by company, but also by sector and
(20:44):
so forth.
So you're not trying to pick winners and
losers.
You're doing it in a context of what
a lot of people like to do is
invest in index.
Yeah.
And there's a certain efficiency there.
But in our case, what we're really just
trying to do is diminish risk.
And that can give us a way to
(21:04):
effectively accomplish that.
So there are other techniques that are even
more involved and sophisticated that maybe go beyond
the scope of a program like this.
But I think it's important to just recognize
that this is a challenge that people...
It's not unique to have this difficulty of
(21:27):
either a long-held stock position, even if
it's inherited, maybe inherited from a parent or
something.
And this is very common.
People have stuff, they just hold onto it
and never change it.
And then now, 20 years later or whatever
it might be, you're faced with, oh, maybe
(21:49):
I should think about my investments in a
strategy that's appropriate for me.
What should I do?
And there's all this embedded tax concern.
So that's not unusual.
It's not unusual for people to have stock
maybe from an employer, maybe to have real
(22:11):
estate that's appreciated, a business that's appreciated.
And having the reality that we've got a
gain that we're going to be faced with,
how do we manage that gain and try
to offset some of that gain through the
use of a technique like this to help
(22:31):
diminish capital gains exposure by capturing losses along
the way or by mitigating the risk through
the use of options as a way to
navigate that.
Or just looking at your overall portfolio and
looking at where there are places where we
can do some changes without some tax burden
(22:53):
to help manage risk.
There's a variety of things to look at.
It's best done in the context of a
financial plan.
Is that where you're going?
Absolutely.
No, I was just going to say that
it's also not like you have to choose
one solution and go with that.
We try to take a look at it
all within that financial plan context as well.
(23:14):
But we look at the whole picture and
we decide, all right, here's what we're going
to do with this piece.
Here's what we would do with this piece.
And maybe some hedging, some tax loss harvesting,
rather than it all being in one specific
strategy.
I remember a couple of clients we've worked
with years past where we had this issue,
(23:34):
appreciated assets, but we also had the desire
for income over a lifetime.
And in some instances, some charitable intentions.
Sometimes people prioritize charitable intent and other times
(23:54):
people just prioritize mitigating, avoiding capital gains.
We talk about a charitable remainder trust, also
known as a capital gains avoidance trust.
It's really more of a, it's not avoidance,
but you're not getting hit with it all
at once.
It's a graduate, you can push it off.
(24:15):
But the idea of taking some position that's
concentrated with a lot of capital gains in
it, we've done this a number of times
where people have donated that stock to this
charitable intention eventually, but get a charitable deduction
(24:38):
right up front.
So some immediate tax benefit and the ability
to then derive income.
We can reposition in the trust that stock
into something that's more diversified and more balanced
and structure it where they can generate a
cashflow from this for themselves, for themselves and
(24:58):
a spouse.
We have one woman who did it with
herself, her spouse, and her sibling.
So as long as any one of them
is alive and their assets remain in the
trust that there's still presumably going to outlive
them all, there's income stream provided to them.
(25:19):
And there's different ways to structure a charitable
remainder trust.
One that's geared to try to maximize income
to the family, the donors, the beneficiaries, but
there's also some that are more regimented, but
can have more growth so that there's more
for the charitable intentions later on.
(25:41):
So depending on what we're trying to do,
there's ways to structure that.
There are other techniques as well that are
state planning techniques.
I think I mentioned one to you.
I didn't even remember now what it was.
Do you remember what my brother mentioned something
to me just today?
I'll look it up.
(26:03):
And that may be something we want to
look into for people as well in their
estate planning, but a deferred sales trust is
another technique he was talking about.
So the estate planning can provide some interesting
opportunities as well that we can try to
collaborate with all these various ways of trying
to manage how best to handle these appreciated
(26:26):
assets.
And the time horizon involved is certainly relevant.
It might be.
The solution or the mitigation of these taxes
may be a multi-year approach.
Yeah, yeah, exactly.
Good point.
And so let's just kind of wind it
down to say that this is all best
(26:47):
done in the context of a financial plan.
So we know how all the pieces fit
together.
We can think about estate planning considerations and
charitable giving considerations.
Think about some of these techniques we've just
elaborated on and the context of the portfolio,
how the rest of all those pieces fit
(27:08):
together.
If you're faced with some of these kinds
of issues, you're not alone.
There's lots of people who have similar kind
of challenges and a little bit of planning
can go a long way and helping you
to navigate that tax cost.
Russ and I were just talking last night
and saying, it seems like tax priorities, tax
(27:28):
issues, it's more on people's minds today than
ever before.
How do I navigate and manage my expenses
when it comes to tax costs as part
of my investment strategies?
It's probably more than ever on people's minds.
There are some great resources and techniques.
(27:52):
And if you need help navigating how that
works for you, give us a call, reach
out.
Don't hesitate to try to see if we
can be a resource in helping you figure
out what's the best path forward, not only
for your portfolio, but for your overall life
circumstances for your financial plan.
So with that, thanks for being with us.
(28:13):
And if any way we can be of
help, reach out.
Until next time, keep striving for something more.
(28:45):
AMR-info at wealthenhancement.com.
You're listening to something more with Chris Boyd
Financial Talk Show.
Wealth Enhancement Advisory Services and Jay Christopher Boyd
provide investment advice on an individual basis to
clients only.
Proper advice depends on a complete analysis of
all facts and circumstances.
The information given on this program is general
financial comments and cannot be relied upon as
pertaining to your specific situation.
(29:06):
Wealth Enhancement Group cannot guarantee that using the
information from this show will generate profits or
ensure freedom from loss.
Listeners should consult their own financial advisors or
conduct their own due diligence before making any
financial decisions.
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