The Concentrated Stock and the Charitable Remainder Trust
Marcus, 58, holds 62% of his $9 million net worth in a single publicly traded stock, XYZ, with a cost basis of $400,000. He is a company insider subject to Rule 144 volume limits and blackout windows. His income is $450,000 per year, he is married filing jointly, and he plans to retire at 65. He wants to diversify but is reluctant to pay capital gains tax and believes XYZ will outperform. He has $1.2 million in a 401(k) and $300,000 in cash. He asks about exchange funds, a charitable remainder unitrust (CRUT), and a variable prepaid forward.
1. Compare the three diversification tools on tax, control, liquidity, and complexity, and recommend a sequencing.
Read the worked answer
Exchange fund. Contributes XYZ to a partnership of diversified assets after a seven-year lock. Defers gain, provides immediate diversification, but gives up control and liquidity for seven years, and the basis carries over. Suitable for the portion he can lock up. Risk: the diversified basket may underperform XYZ, and he has no ability to exit early without triggering the gain.
CRUT. Irrevocable contribution of XYZ; the trust sells tax-free and pays him a unitrust percentage for life. He gets a charitable deduction for the remainder interest, removes the asset from his estate, and diversifies, but he irrevocably gives up principal and the income stream is taxable. Suitable for the portion he intends to give to charity anyway.
Variable prepaid forward. Monetizes up to ~75-90% of value now with deferred gain, retains some upside and downside, but is complex, has counterparty and tax-risk exposure (constructive sale rules under IRC §1259), and is best for a modest slice.
Sequencing recommendation: (1) Fund spending and emergency reserves from cash. (2) Use the CRUT for the charitable-intent slice, sized to his actual philanthropic goals. (3) Use an exchange fund for the portion he can lock for seven years. (4) Consider a prepaid forward only for a small residual slice. (5) Use annual gifts to family and a 10b5-1 plan to sell within Rule 144 limits over time. Document that no single tool solves the whole problem and that the plan must respect blackout windows.
2. How should the advisor address Marcus's belief that XYZ will outperform, and what behavioral and fiduciary risks does this create?
Read the worked answer
The advisor should treat the belief as a testable hypothesis rather than a fact to argue with. Present the base rates: single-stock outcomes are highly skewed, and a 62% concentration is a portfolio-level risk that dwarfs any expected alpha from the position. Frame the question as "how much of your wealth should be exposed to one company's idiosyncratic risk?" rather than "will XYZ beat the market?" Show the drawdown math: a 50% decline in XYZ would cost ~31% of net worth.
Behavioral risks: familiarity bias and overconfidence (he works there), anchoring to the purchase price and to prior highs, and loss aversion around realizing gains. The advisor should use a written decision framework and a pre-commitment plan so decisions are made before emotions peak.
Fiduciary risks: the advisor must document that concentration risk was disclosed, that the client made an informed decision, and that the advisor did not facilitate an unsuitable strategy. If the advisor has discretion, the IPS should cap single-position exposure and set a glide path to reduce it. If the client insists on holding, document the informed-consent conversation in writing and set a review trigger (e.g., re-evaluate at each 10% move or at retirement).
3. Marcus is subject to blackout windows and Rule 144. How does this affect the implementation calendar?
Read the worked answer
Rule 144 limits affiliate sales by volume (the greater of 1% of outstanding shares or the average weekly trading volume over four weeks) and requires current public information and Form 144 filing. Blackout windows restrict trading around earnings and material events. The implementation calendar must therefore be built around a rolling 10b5-1 plan that executes during open windows and within volume limits, with the plan adopted when he is not aware of material nonpublic information.
The CRUT and exchange fund contributions are also securities transactions and must be timed to open windows and pre-cleared with company counsel. The advisor should build a 24-36 month calendar showing expected sale capacity, then size the CRUT and exchange fund contributions to fit within that capacity. Because the 10b5-1 plan must be adopted in good faith and not modified opportunistically, the advisor should build in buffer and avoid over-committing to a schedule that assumes full volume each window. Document the calendar and the legal review in the file.