Managing Concentrated Stock Wealth An Advisor's Guide to Building Customized Solutions

Managing Concentrated Stock Wealth, Second Edition is the adviser's guide to skillfully managing the risk and opportunity presented by concentrated stock holdings. Written by Tim Kochis, a recognized leader in financial planning, this book walks you through twenty strategies for managing concentrated stock wealth. Each strategy equips you with the tools and information you need to preserve and grow your clients' wealth. Supported with examples from the author's forty years of experience, this practical resource shows you the available options, the best order for clients to review those options, and the reasons why some options are better than others. Kochis addresses common obstacles—such as securities law, taxes, and psychological resistance—and shows you the strategies and execution to prevail.

This new second edition includes:

• Updated references, calculations, and illustrations regarding the latest tax laws
• Revised coverage of derivatives strategies and more examples of potential blind spots
• Tactics to convince some clients to diversify their portfolios and optimize their wealth
• Techniques to exploit concentration in pursuance of greater wealth

They say that you should never put all of your eggs in one basket, but compensation packages, inheritances, IPOs, buyouts, and other situations leave many investors holding a significant portion of their wealth in one stock—often leaving their portfolios in a dangerous position. Managing Concentrated Stock Wealth, Second Edition shows you how to manage the risks and turn a precarious position into an advantage.

TIM KOCHIS is the CEO of Kochis Global, a firm he founded to advance best-in-class wealth management and investment planning services, especially in the emerging economies of Asia. He pioneered the independent model in the U.S. financial services industry, chaired every professional organization in his field, received every achievement award his profession confers over more than 40 years, and directly provided personal financial planning services to thousands of clients at Bank of America, Deloitte, and Aspiriant.

MICHAEL J. LEWIS is the Director of Wealth Strategies at Vernal Point Advisors. Michael previously worked at Aspiriant from 2008–2015, where he served as a wealth manager for high net worth and family office clients, and was deeply involved in developing the firm's systems and intellectual property. At Vernal Point Advisors, Michael focuses on areas of concentrated wealth management, executive compensation optimization, and family office services.

Foreword xiii

Acknowledgments xvii

Introduction xix

Getting the Priorities Straight xix

Knowing the Client xxi

Chapter Note xxiii

Part I: Sales

Chapter 1 Constraints on Managing Concentration Risk 3

Taxes 4

Pre‐IPO Illiquidity 8

Post‐IPO Lockups and Other Market Considerations 8

SEC Constraints, the Sarbanes‐Oxley Act, and Dodd‐Frank 10

Notice and Reporting 10

Controlled Sales of “Founder Stock” 11

No Trading on Material, Nonpublic Information 11

No “Short‐Swing” Profits for Corporate Insiders 11

No Favorable Financing for Senior Executives 12

Employment/Career Constraints 12

Psychological Barriers 14

Chapter Notes 17

Chapter 2 Sale and Diversification 19

Overcoming the Tax Constraint 21

Overcoming Psychological Barriers 24

ESOP Sales 25

Pre‐IPO Considerations 26

Let’s Just Sell It 27

Chapter 3 Coordinating Long Shares with Stock Options 29

Employee Stock Options 30

Taxes on Options 32

Exercise Strategies 35

Swapping 40

Option Leverage 40

Long Shares: No Leverage 42

Ordering Rule 42

Chapter Note 43

Chapter 4 Diversification Sales and Deferred‐Compensation Plans 45

Deferred Compensation: Then and Now 46

Sweetening the Pot 47

Risks and Returns 48

The Rabbi Trust 51

Investment Options 52

The Benefits of Deferral 52

The Coin’s Two Sides 54

Chapter 5 An Out for Insiders 55

SEC Rule 10b5‐1 Plans 56

Third‐Party Discretion 57

Formula Plans 57

Short‐Swing Constraints 58

Sales During Retirement‐Plan Blackout Periods 58

Plan Logistics 58

Prearranged Plans: Often a Corporate Requirement 59

Appendix XYZ Co. Nondiscretionary Rule 10b5‐1 Sales Plan 59

Chapter 6 Restricted Stock: Tackling Temptation 67

Managing the Section 83(b) Election 68

All That Glitters 69

Risk of Forfeiture 71

Opportunity Cost 72

A Second‐Best Strategy 74

Seeing the Light 75

Complications for Insider 76

The Right Fit 77

Chapter Note 80

Appendix 80

Part II: Gifts

Chapter 7 Gifts to Family 85

Transfer Taxes 85

Income Tax Leverage 89

Special Rules on Employer Stock 90

Transfer Structures 90

Gifts Under the Uniform Transfers to Minors Act 91

Minor’s Trust 91

Intentionally Defective Grantor Trusts 92

Family Limited Partnerships 94

Gaining Psychic Distance 95

Chapter 8 Nonqualified Stock Options: Gifts to Family 97

Investment Leverage 98

Tax Leverage 99

Timing and Valuation 100

Chapter 9 Gifts to Charity 105

Tax Savings 105

The Cost of Charitable Gifts 107

Special Income Tax Considerations 109

Loss Positions 109

Short‐Term Gains 109

Seasoned Incentive Stock Option Stock 110

Low‐Basis Shares 110

IRA Assets 111

Tangible Personal Property 111

Structures for Charitable Gifts 112

Direct Gifts 112

Donor‐Advised Funds 112

Private Foundations and Supporting Organizations 114

A Word of Caution 115

Appendix: Key Characteristics of Charitable Vehicles 116

Chapter 10 Charitable Trusts 119

The Charitable Remainder Trust 120

Tax Requirements and Opportunities 121

Tax Deferral 122

Coordinating a CRT with the Client’s Financial Plan 123

The Charitable Lead Trust 125

Chapter 11 Nonqualified Stock Options: Gifts to Charity 129

The Charitable Gift 130

Mismatches of Valuation and Timing 131

Why Bother? 132

Charities Close to Home 133

The Wealth Effect 134

Part III: Retention

Chapter 12 Margin: An Acquired Taste 137

Margined Diversification 138

Logistics 138

Margin and Liquidity 140

Reduced Risk 141

Enhanced Return 141

The Unexpected 145

Margin Calls 147

Chapter Notes 148

Chapter 13 Managing Concentration Through an Index Proxy 149

Tax Management 149

The Index‐Proxy Account 150

Managing Concentration Risk 151

Limitations and Drawbacks 153

Asset‐Class Limitations 153

Tracking Error 153

Higher Expenses 154

Deferred Tax Liability 154

Chapter 14 Exchange Funds 157

By Invitation Only 157

Costs and Benefits 158

The Future of Exchange Funds 160

Stock Protection Funds 160

Chapter Notes 162

Chapter 15 Derivatives and Hedges: Buying Time 163

The Versatile Hedge 164

Selling Calls 164

Changing a Mindset 165

Buying Puts 168

Collars 170

The Put‐Spread Collar 171

Tax Consequences of Derivatives 171

The Forward Contract 172

A Competitive Market 174

Chapter 16 Powers of Concentration 175

Embracing Risk 175

Corporate Stock‐Holding Requirements 177

Stock Options: The Decision to Hold 179

The Golden‐Parachute Constraint 180

Capturing Dividends 181

Change in Tax Rates 181

Incentive Stock Options and the Alternative Minimum Tax 182

Gifts of Options 183

Charitable Lead Trust 184

Company Stock in IRAs or Qualified Retirement Plans 184

The Control Premium 186

Chapter Note 188

Afterword 189

About the Author 193

About the Contributing Author 195

Index 197

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