Concentrated Employer Stock and the Step-Up Trap

Concentration Employer stock is $1.43 million of a $2.1 million portfolio, or 68%. The diversified fund is 17.6% and cash 14.3%. A single company, and the same company that pays his salary, drives most of his net worth. That is compounded human-capital risk: a corporate failure could reduce his job, his bonus, his pension-linked benefits and his portfolio at the same time.

Downside arithmetic A 40% decline in the stock would destroy about $572,000, or 27% of the total portfolio, and would leave him near retirement with a materially smaller base. A 60% decline would remove about $858,000. The pension and Social Security cover only 55% of target spending, so the portfolio must fund the remaining 45%; a large loss directly threatens that.

The 'never sell' rationale is flawed

• The gain is about $1.25 million, but unrealised gain is not the same as protected wealth. Tax deferral does not eliminate the risk that the asset falls.
• The step-up at death is valuable, but it is contingent on holding until death. Between now and then, the portfolio bears full market risk. The expected tax saving must be weighed against the risk of a permanent capital loss.
• If the stock falls, the tax problem shrinks but the retirement problem grows. The tail is wagging the dog.
• As an executive, he may also face trading windows, blackout periods and insider-trading rules, which affect how and when he can sell; the plan must be built around those constraints, not ignored.

Conclusion The concentration is the primary risk; the tax is a cost of fixing it, not a reason to retain it.

Target Set a maximum single-stock exposure of 20–25% of investable assets, to be reached over two to three years rather than in one sale. A staged path reduces the risk of selling at a single bad price and spreads the tax across years.

Mechanics

• Tax budget: estimate the capital gains tax on each tranche at his marginal rate, including any surtax, and sell only up to a planned annual gain. Use losses elsewhere in the portfolio to offset gains where available.
• Tranche schedule: for example, sell 20–25% of the holding per year, with fixed dates or price bands written into a plan. Rebalance the proceeds into the diversified fund and a short-duration bond allocation appropriate to a three-year retirement horizon.
• Hedging during the glide path: a collar or prepaid variable forward can protect part of the position while sales occur, but these are complex, have costs and counterparty risk, and must fit company policy. Do not let a hedge become a permanent substitute for diversification.
• Charitable route: if he genuinely supports his university, donating low-basis shares to a donor-advised fund or charitable remainder trust can diversify the remaining exposure and produce a deduction while removing the embedded gain. This should be sized to his actual charitable intent, not used as a tax shelter.
• Company constraints: clear any trading plan with legal/compliance and consider a pre-scheduled selling plan if permitted.

Renovation cash The $180,000 should be moved out of the cash pool into a segregated short-term reserve (deposit or short-dated government securities) now, so it is not exposed to equity risk or confused with investable retirement assets.

Governance Document the target, the annual tax budget and the review dates. The measure of success is reduced concentration, not avoidance of all tax.

Frame it as a comparison of two risks, not two certainties

Path A - hold to death. He avoids capital gains tax and the children receive a stepped-up basis if the law at that time provides it. But he retains a 68% single-stock position through retirement. If the stock falls 50%, the children inherit roughly $715,000 of stock instead of $1.43 million, and the step-up applies to a much smaller number. Tax saved on a loss is not a benefit.

Path B - diversify now. He pays tax on realised gains, but the after-tax proceeds are invested broadly and can compound. The family keeps more of the wealth if the stock underperforms, and less if it continues to outperform dramatically.

Key points

• Step-up is a rule that may change. He should not build a retirement plan around a tax provision that a future legislature can amend.
• The step-up does not help him. It benefits heirs. His own retirement security depends on the portfolio's value while he is alive, and 55% of spending is covered by pension and Social Security, leaving a significant portfolio dependency.
• A middle path exists. Sell enough to bring the position to a prudent level, retain a meaningful residual if he wants continued upside, and use charitable giving for part of the low-basis holding if the philanthropic intent is real.
• Test the preference. Ask what matters more: maximising the expected inheritance or protecting the retirement plan and the family's floor. If the answer is the latter, the concentration must come down.

The adviser's role is to make the trade-off explicit and quantified, not to win the argument.