The Concentrated Stock and the Charitable Ask
Marcus, 58, is a long-tenured executive at a public software firm. His $3.4M portfolio is 71% in his employer's stock held in a taxable account with a very low cost basis; the remainder is in a diversified 401(k). He is charitably inclined and wants to give $250k to his alma mater this year. He also wants to "de-risk" because he is nervous about the stock. His marginal federal rate is 35%, plus a 5% state rate, and he is subject to the 3.8% net investment income tax. He asks whether he should sell $250k of stock to fund the gift and then reinvest the proceeds in a diversified fund.
1. Evaluate Marcus's proposal to sell stock and donate the cash versus donating appreciated shares directly.
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Selling first triggers capital gains on the low-basis shares, and those gains are exposed to the 20% top rate plus the 3.8% NIIT plus state tax - potentially over 28% combined on the appreciation. Donating the appreciated shares directly to a qualified charity generally avoids recognizing the gain while still allowing a deduction for fair market value (subject to the applicable percentage limits and holding-period rules). The difference is the tax on the embedded gain that is permanently avoided. If he wants to retain market exposure, he can donate the shares and repurchase the same position with cash, resetting basis at the new price. Recommend donating appreciated shares rather than selling, and confirm the charity can accept securities.
2. How should the concentrated position be reduced given the tax drag, and what role could a donor-advised fund play?
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A staged reduction over several tax years smooths the gain recognition and avoids pushing him into higher brackets. Tools to consider: (1) a donor-advised fund funded with appreciated shares, which front-loads the charitable deduction while granting gifts over time and removes low-basis stock from the portfolio; (2) exchange funds or completion portfolios to diversify without immediate sale, weighing fees and lockups; (3) charitable remainder trusts for larger gifts; and (4) gifting shares to lower-bracket family members. Because the position is 71% of the portfolio, the risk-management case for reducing it is strong - but the method should be tax-aware, not a single lump-sum sale.
3. What client-assessment issues should you explore before recommending a plan?
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Probe his true risk tolerance versus capacity: he is nervous, but his human capital is also tied to the same firm, so a downturn hits both his job and his portfolio. Ask about insider-trading and company policy constraints (blackout windows, pre-clearance, hedging prohibitions) that may restrict sales or exchanges. Clarify liquidity needs, time horizon to retirement, and any outstanding loans or pledges against the shares. Confirm the charitable intent - one-time or ongoing - and whether a donor-advised fund matches his desire for flexibility. Document the concentration risk discussion in writing.