Big position in one stock
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Would like an opinion from some of you pro's, I am a little rusty (been out of the business for 5 years)
3 siblings inherit 850,000 of a single stock in a credit shelter trust, the stock was inherited 2 years ago and they now want to diversify. I hate to tell them to sell it all at once. Seems like Murpphy's law once you sell it , next year at this time it will be worth double. What is a good strategy to use in this situation. Sell 25 % now, write/buy options and schedule to sell the rest?
I know it would help you if I told you the name of the stock and cost basis, but feel a little funny about posting that. It is a NYSE, medium size company that manufactures tool components.
If these 3 siblings are adults, simply present them with the choices available to them (and the associated pros and cons) and let them decide. That way, if it blows up, they blame themselves.
Hi Meno! Haven't seen you in a while.
Are you referring to Exchange Traded Funds (ETFs)?
Starka,
Nope.
Exchange fund (aka swap fund):
For investors with large concentrated stock positions, very often with a low cost basis, exchange funds provide access to diversification by exchanging a single stock for a professionally managed portfolio. Because of the way an exchange fund is structured, the swap of one stock for a portfolio of stocks is not considered a taxable event—giving the investor diversification without capital-gains taxes.
OK, I know what you're talking about now.
I've never had a need for them, but as we have a lot of Publix employess in the area, I looked at them a while back. I thought that they were only used for closely and privately held stock.
[quote=Starka]
Hi Meno! Haven’t seen you in a while.
Are you referring to Exchange Traded Funds (ETFs)?
[/quote]
Silly Starka,
You didn’t know what an exchange fund was.
I thought you were the all knowing?
I’m at Jones and even I knew what an exchange fund is.
BPD
I never claimed to know everything, Chump. But one doesn't have to know much to know infinitely more than you do.
That's quite a photo on the Edward Jones website, by the way.
Wow. Moneymom just wrote about a situation that I have as well except with a twist. I have clients who have approx 850K in two trusts with the larger amount being in the credit shelter bypass trust. Almost 70% of the portfolio is concentrated in one stock. The twist is that we need to maximize income to provide for the benificary of both trusts who is in ltc. There is no way the current position is providing enough income so this means some significant repositioning or systematic liquidating.
An exchange fund probably won't work for this situation since the are in need of immediate income and don't want to hold the exchange fund for the required time. I have used that strategy just recently for another client who had a large position in one stock that was inherited with an extremely low cost basis due to some tricky legal work by the deceased owners lawyer. My client inherited the stock over 10 years ago and would have had some big gains in any case.
I have some ideas of what to propose to my trust clients, but would be interested to hear what you guys would do in this situation.
I know it may sound overly simplistic, but set a disciplined table with time and price targets. That is, sell a predetermined amount of the stock the next time it reaches a certain price on the high side or the low side. If the stock remains rangebound, sell it at market price at the pre-determined time. This also helps family who may have some emotional attachment to the stock to gradually divest over a period of time. It can also help in achieving a conscensus with various parties who interests and priorities may differ. I’ve gone through this a couple of times myself. I know it can be very difficult to strike a balance betweeen negotiating a compromise between all the parties, doing what is right for the client(s), doing right by the grantor of the trust, and maintaining your own impartiality and professionalism while not appearing to be foolish, short-sighted, greedy, or taking a sit-on-your-hands approach. I wish you luck.
[quote=menotellname]
Two words: exchange fund
[/quote]I didn’t know you could do this with only $850K.
If the position is on one account, you can possible do a cost free
collar on the position, which secures the downside and puts a "sell"
point, set up a loan on a the position and use the proceeds to
diversify. This gives liquidity, downside protection, a target
sell point, and diversification.
I agree about giving them options but when presented with this situation, I always ask if you had nothing and I gave you $850,000 would you put it all in this stock? I then point out Enron, Aol, EMC, Conseco. Etc., The reality is if things get bad for the stock you will get worried and so will they and they may not weather the storm and may sell low and then it will pop or even worse they will lose their savings. I had a friend that worked at AOL watch his 5mm turn to 500k, (I know what you are saying if he was your friend why didn't you have his account, good question..) I also have a great client that had a huge position in EMC and I got him out at 80 and diversified, the stock is now 14 and he is forever greatful, if you do the right thing and explain the downside, I think selling the whole position will make sense, thats my 2 cents:)
[quote=rightway] [quote=menotellname]
Two words: exchange fund
[/quote]
I didn't know you could do this with only $850K.
If the position is on one account, you can possible do a cost free collar on the position, which secures the downside and puts a "sell" point, set up a loan on a the position and use the proceeds to diversify. This gives liquidity, downside protection, a target sell point, and diversification.
[/quote]
Rightway,
If you were going to go to all the trouble to do that, why wouldn't you just go ahead and do a Pre Paid Forward, which is basically what you are doing anyway. You negotiate a price to sell the securities at a future date, say 3 years from now, keep the securites, and they loan you an amount (ex. 1MM of UPS gets you 850M of cash) so you can go into a diversified portfolio and put off paying the taxes. In the mean time, you have a diversified portfolio that you receive dividends and upside potential AND still participate in the dividends and potential upside of the pledged stock. We (ML) had a company that we did that through.
It's basically what you are saying...only downside is, I think with ours (ML's) you might have needed a million to get to participate.
I can't remember the name right off, but I could get it on Monday if anyone is interested.
[quote=BankFC][quote=rightway] [quote=menotellname]
Two words: exchange fund
[/quote]
I didn't know you could do this with only $850K.
If
the position is on one account, you can possible do a cost free collar
on the position, which secures the downside and puts a "sell" point,
set up a loan on a the position and use the proceeds to
diversify. This gives liquidity, downside protection, a target
sell point, and diversification.
[/quote]
Rightway,
If you were going to go to all the trouble to do that, why wouldn't you just go ahead and do a Pre Paid Forward, which is basically what you are doing anyway. You negotiate a price to sell the securities at a future date, say 3 years from now, keep the securites, and they loan you an amount (ex. 1MM of UPS gets you 850M of cash) so you can go into a diversified portfolio and put off paying the taxes. In the mean time, you have a diversified portfolio that you receive dividends and upside potential AND still participate in the dividends and potential upside of the pledged stock. We (ML) had a company that we did that through.
It's basically what you are saying...only downside is, I think with ours (ML's) you might have needed a million to get to participate.
I can't remember the name right off, but I could get it on Monday if anyone is interested.
[/quote]Your right with the minimumsn on the pre-paid forwards. It is an awsome process, but I am not sure it is even as low as 1 mil. The other issue is the cost. If you have a smaller position like this (realizing $850K is not small...but in the world of concentrated stock specialistsit, it is...) sometimes the costs kill you when you involve the specialists (at ML anyway). I have done a few collars myself and they are real easy if you have the right stock.
Rightway,
I assumed that cost and minimums were why you were using the collar...I am not as familiar with them, but I'm glad that they aren't all that difficult, as you said, as long as you have the right stock (I assume a relatively low volitility stock)
If I come across such a situation, I'll drop you a PM and get your thoughts if that is alright?
[quote=menotellname]
Two words: exchange fund
[/quote]
Not a bad plan, but since their cost basis only goes back two years they may not be facing the unrealized gains problem that makes the cost of an exchange fund worthwhile. I'd want to know their tax situation and I'm not familiar with exchange funds that welcome amounts below $1M. There's also the concern that their particular holding isn't one the exchange fund is willing to take on.
Bottom line, it's worth investigating, but you really need more info.
Well, I seem to be getting a spurt of these types of scenarios recently. In addition to the A/B trust people who need income and hold a large position in one stock, I now have a family who have inherited a very nice stock portfolio of which over 60% (approx 620K) is in one company. An exchange fund (even if there is one that would take less than 1m in stock) is not in the works for either of these clients since they either 1) need immediate income or 2) don't have a cost basis problem.
For the second client I am going to try to explain and recommend putting a collar on the position and gradually reducing the large position. My A/B trust people who must have income is another story. I am going to recommend tax free income investments in the B trust and reposition some of the A trust to also generate more current income but still leave a substantial amount of approx 200 to 250K in the stocks and mutual funds they currently own. The OP was concerned about selling a large stock position all at one time.
What other suggestions or what would you do?
Isn't this much more fun that bashing that mean old Edward Jones
Think about using a CRAT/CRUT or GRAT/GRUT. Depends on what they’re trying to accomplish. Sell the stock, take an income.