Sixty-Eight Percent: Mei's Employer Stock Problem

Scale of the risk. $2.86m is 68% of $4.2m of net worth, roughly 4.5 times a tolerable 15% single-stock limit. At 42% volatility, a two-standard-deviation year is plus or minus 84%; an ordinary 50% drawdown in the name would erase $1.43m, more than everything else she owns combined.

The risk is also correlated, which is worse than mere volatility. Salary, bonus, retirement match and the value of her unvested equity all depend on the same firm. If it fails, she loses her job, her bonus, her match and most of her savings in the same quarter. This is not a diversification statistic; it is a single point of failure.

The basis argument. A $310,000 basis on $2.86m means $2.55m of unrealised gain and roughly $735,000 of tax at 28.8%, payable only on the slice actually sold. Deferral is worth perhaps 5-6% a year on the deferred tax, which is far less than the uncompensated risk of holding a 42%-volatility asset at 4.5 times a prudent weight.

The framing matters: the choice is not between 'sell and pay tax' and 'hold tax-free'. It is between owning a $2.55m concentrated bet in order to defer $735,000, and owning a diversified $2.1m after tax. The tax is avoided entirely only if she holds until death, which means holding for decades.

Target. Reduce employer stock to 15% of net worth or less, about $600,000-$650,000, within four years. That means selling roughly $2.2m gross, or $550,000 a year, scheduled around blackout windows (assume six to eight open weeks a year) and pre-clearance.

Vehicles, in order of tax efficiency:

• 10b5-1 plan. Adopt it outside a blackout, with the applicable cooling-off period for officers, and no subsequent influence over trades. Schedule quarterly sales sized to the annual target so execution does not depend on her view of the price.
• Donor-advised fund. Fund the planned $300,000 with the lowest-basis lots. She gets a deduction at fair value and avoids roughly $86,000 of capital gains tax on that slice. Bunch the deduction into a peak-income year.
• Exchange fund. Deferral only, with a seven-year lock, real-estate concentration and fees. Cap at $300,000-$500,000; it is not a substitute for selling.
• Collar. Check policy first, since many issuers restrict officer hedging, and a collar caps upside. It buys time; it does not diversify.
• Charitable remainder trust only if she wants an income stream and is comfortable with an irrevocable structure.

Tax drag. On $550,000 of sales, gain is about 89% of proceeds, so tax is roughly $141,000 a year and net proceeds about $409,000. Four years of that plus the donor-advised fund gets her to roughly 12-15%. Redirect future bonus shares and the employer match into diversified assets rather than reinvesting.

The step-up is a bet on three independent things at once: that she dies still holding the shares, that the company survives and outperforms over that whole period, and that the relevant tax rules do not change before then. It also ignores the practical point that she plans to retire at 60 and will need to spend the money. A step-up is worthless to someone who has to sell at 61 to fund living costs.

The comparison is asymmetric. The certain, quantifiable cost of diversifying is the tax on the slice sold, roughly $141,000 a year at her planned pace. The uncertain benefit is a full step-up at an unknown future date. Against that sits the possibility of a permanent 50% loss, roughly $1.43m, on a single name with 42% volatility that also pays her salary. Any reasonable probability weighting favours diversifying.

Two further points. First, a federal step-up does not necessarily remove state estate tax, depending on domicile. Second, if she intends to give to charity, doing it now with the lowest-basis shares captures the deduction while she has income to offset, which is strictly better than a posthumous bequest of the same shares. The step-up argument is a reason to be tax-efficient about selling; it is not a reason to stay concentrated.