Best Option to Sell Long Held Individual Stock

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Big Jim24
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Best Option to Sell Long Held Individual Stock

Post by Big Jim24 » Sun Oct 13, 2019 2:40 pm

My 88 year-old mother owns a good deal of Exxon stock, which she inherited in 1991 at the latest, so she has quite a bit of gains. It makes up about 20% of her investments, which causes pretty dramatic shifts in her portfolio. She is a widow, so it's all hers. Most of the rest of her portfolio is in low-risk investments, and it's all with Morgan Stanley.

The Exxon stock is in a family trust and will be passed on to my siblings and I at some time in the future (she's in great health and I think she will make it to the century mark and beyond). She likely has enough other assets that she should never need to sell the stocks, but wants to see if there are any ways she can get out of the stock (all or partial) to get lessen the volatility of her portfolio, without taking a big tax hit. Is there any way that she can convert it to anything else?

She still has retirement income from pensions as well.

rossington
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Re: Best Option to Sell Long Held Individual Stock

Post by rossington » Sun Oct 13, 2019 3:19 pm

Welcome!
I am assuming you mean Exxon Mobile stock and it is in a living trust.
Don't see how she can avoid the cap gains taxes. Maybe sell small share lots over time to minimize this. Are the shares all the same tax basis?
If she doesn't need the money it is probably better to hold on to it...in addition to her income she still has the other 80% of her portfolio.
When she passes the trust beneficiaries will get the stock on a stepped up basis.
But, having said that I hope your Mom lives a very long and happy rest of her life.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Wiggums
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Re: Best Option to Sell Long Held Individual Stock

Post by Wiggums » Sun Oct 13, 2019 4:37 pm

If she doesn’t need it, hold or donate some shares to charity.

When you contribute cash, securities or other assets to a donor-advised fund at a public charity, like Fidelity Charitable, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity.

illumination
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Re: Best Option to Sell Long Held Individual Stock

Post by illumination » Sun Oct 13, 2019 5:30 pm

It might sound morbid, but from a financial standpoint, it's probably best for her to own it until she dies so you get that stepped up basis. Otherwise, prepare for a large check to the IRS when she sells.

Just as an example, if she put $10,000 in XOM in 1991, today that would be worth over $300,000. After all the federal and state taxes, it really adds up. But if she dies while holding it though, it's like she just purchased it and has zero gains for the estate.

Stop reinvesting the dividends though and if dividend reinvestment has been in place over all these years, you might sell those specific shares as they likely are underwater. Exxon has not been a great stock in recent history, but over the long term has done really well.

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Watty
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Re: Best Option to Sell Long Held Individual Stock

Post by Watty » Sun Oct 13, 2019 6:00 pm

A few sort of random points.
Big Jim24 wrote:
Sun Oct 13, 2019 2:40 pm
It makes up about 20% of her investments,
If has investment in mutual funds they may own the stock within the mutual fund too so her combined exposure could be even higher.

You did not say what her overall asset allocation is but if it is something like 40% stocks and 60% bonds then the Exxon stock could be half of her stock holdings. That might make selling a bit of the stock each year a reasonable choice even if it means that she has to pay some taxes.

One risk of holding it until she dies to get the stepped up cost basis is that the tax laws could change by then and the estate might not actually get it at a stepped up cost basis. We cannot discuss proposed legislation here but that has been proposed several times even though it never passed.

In the tax calculations don't forget to look at the state capital gains taxes, inheritance and estate taxes.

stumpy
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Re: Best Option to Sell Long Held Individual Stock

Post by stumpy » Sun Oct 13, 2019 7:17 pm

I had a similar question in July of this year. I also have ExxonMobil stock I would like to sell that I purchased in the early 80s. The replies I received stated if I stay below 75,000 adjusted gross income there would be no capital gains tax. I googled it and found that to be true. But I would still talk to a tax accountant to be sure since I am no tax expert. I will only be selling enough to keep me below the 75K AGI. That is under the new Trump tax laws it may change after next election. I gave my two older boys $6000 worth to help pay for their weddings. I will do the same for my youngest when he gets married. I will also be gifting some to my grandkids. None of that is taxable since it is a gift(below what would be taxable) and they will get to use the step up value of the stock. So it becomes a win-win for both. Again I would verify this with the tax accountant.

TBillT
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Re: Best Option to Sell Long Held Individual Stock

Post by TBillT » Sun Oct 13, 2019 7:36 pm

Basically if you can keep low income on your Form 1040, you can sell quite a bit of stock and pay low federal taxes.
However, your state may want a tax which can easily be the biggest tax.
Not sure how living trust impacts this.
What you can also do is sell the higher priced shares, so you do have as much cap gains.
A number of games with donations, as noted above, and some states offset state taxes for donations to certain state-approved charities.

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Stinky
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Re: Best Option to Sell Long Held Individual Stock

Post by Stinky » Sun Oct 13, 2019 7:49 pm

Welcome to the Forum! Glad that you posted your question.

If she makes donations to charities, do this. Either direct donations or through a DAF. And note that she can name “successors” to Fidelity Charitable if she passes away before all funds are disbursed.
Wiggums wrote:
Sun Oct 13, 2019 4:37 pm
If she doesn’t need it, hold or donate some shares to charity.

When you contribute cash, securities or other assets to a donor-advised fund at a public charity, like Fidelity Charitable, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity.
If she doesn’t want to go the charitable route, consider this:
illumination wrote:
Sun Oct 13, 2019 5:30 pm
It might sound morbid, but from a financial standpoint, it's probably best for her to own it until she dies so you get that stepped up basis. Otherwise, prepare for a large check to the IRS when she sells.

Just as an example, if she put $10,000 in XOM in 1991, today that would be worth over $300,000. After all the federal and state taxes, it really adds up. But if she dies while holding it though, it's like she just purchased it and has zero gains for the estate.

Stop reinvesting the dividends though and if dividend reinvestment has been in place over all these years, you might sell those specific shares as they likely are underwater. Exxon has not been a great stock in recent history, but over the long term has done really well.
Last edited by Stinky on Sun Oct 13, 2019 8:30 pm, edited 1 time in total.
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MathIsMyWayr
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Re: Best Option to Sell Long Held Individual Stock

Post by MathIsMyWayr » Sun Oct 13, 2019 7:52 pm

stumpy wrote:
Sun Oct 13, 2019 7:17 pm
I gave my two older boys $6000 worth to help pay for their weddings. I will do the same for my youngest when he gets married. I will also be gifting some to my grandkids. None of that is taxable since it is a gift(below what would be taxable) and they will get to use the step up value of the stock. So it becomes a win-win for both.
When you gift appreciated stocks, the original cost basis is not stepped-up, but is transferred to the giftee.

delamer
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Re: Best Option to Sell Long Held Individual Stock

Post by delamer » Sun Oct 13, 2019 7:58 pm

If she is reinvesting dividends to buy more shares, she should definitely turn that off and take cash.

Depending on her other income, she may be able to sell some shares and pay 0% capital gains tax (federal).

You can use the TaxCaster app to estimate the effect on her taxes of various levels of share sales.

delamer
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Re: Best Option to Sell Long Held Individual Stock

Post by delamer » Sun Oct 13, 2019 8:01 pm

MathIsMyWayr wrote:
Sun Oct 13, 2019 7:52 pm
stumpy wrote:
Sun Oct 13, 2019 7:17 pm
I gave my two older boys $6000 worth to help pay for their weddings. I will do the same for my youngest when he gets married. I will also be gifting some to my grandkids. None of that is taxable since it is a gift(below what would be taxable) and they will get to use the step up value of the stock. So it becomes a win-win for both.
When you gift appreciated stocks, the original cost basis is not stepped-up, but is transferred to the giftee.
Just wanted to weigh in that MathIsMyWay is correct.

The gifted stock does not receive a step-up in cost basis. That only happens, in most cases, if the stock is inherited.

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grabiner
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Re: Best Option to Sell Long Held Individual Stock

Post by grabiner » Mon Oct 14, 2019 8:16 am

One thing she could do to reduce her risk would be to buy put options. The purpose would be to get insurance about a significant loss; the option price is a premium for this loss. (Make sure you understand what you are doing with options; they are often used to magnify risk or take additional risk, but this is one use to reduce risk.)

As of Friday (market not yet open today), the stock was trading at $68.98. A put option at $50 expiring 9/18/2020 could have been bought for $1.24 (ask price). So this would give up 2% of the return, but would cap the loss for one year at 27%. If the stock happens to drop to $40 next year, she can sell the put and get $10 back.

The problem with this strategy is that the put (for insurance) has to be renewed every year, so it eats significantly into the return. If she expects to live ten more years, it could be costly. I am more likely to recommend this for stock that needs to be protected for a shorter time.
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fabdog
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Re: Best Option to Sell Long Held Individual Stock

Post by fabdog » Mon Oct 14, 2019 8:29 am

you mention the stock is held in a family trust. If it's a living trust which is just getting results reported against her SSN then the advice on trying to use lower tax brackets to sell some over time to use low capital gains rates may apply

If this is a family trust with it's own EIN (perhaps created when her spouse passed) cap gains cannot be passed thru to the beneficiaries except when the trust is wound up. Tax rates in trusts are very high, very quickly. I do not beleive these type of trusts can contribute to charities, unless specified in the trust documents

Depending on the terms of the trust, she may be able to distribute the shares now, but they would not get a step up in basis. It may be simplest to let the shares stay in the trust. If she has sufficient assets and income the volatility is not the worst problem to have.

Since Morgan Stanley is handling the trust, ask them for options on reducing the XOM exposure in the trust. Let them earn some of those fees. If she has a tax person doing the trust taxes they can offer advice as well, knowing the terms of the trust and tax treatment of any dispositions

So step 1 is understanding how the assets are held/titled, and working on a plan from there. But also, the best plan may be to do nothing

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cas
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Re: Best Option to Sell Long Held Individual Stock

Post by cas » Mon Oct 14, 2019 9:18 am

Big Jim24 wrote:
Sun Oct 13, 2019 2:40 pm
My 88 year-old mother owns a good deal of Exxon stock, which she inherited in 1991 at the latest [ . . .]

The Exxon stock is in a family trust and will be passed on to my siblings and I at some time in the future
(bold added by me. ETA: fabdog and I were apparently working on our posts at the same time. Didn't see fabdog's post until after I posted mine.)

I guess I'm not quite as willing as other posters to assume that the "family trust" is a revocable living trust and that the cost basis is going to get a step up upon your mother's death.

OP - Do you have more information on whether this "family trust" is a revocable living trust or an irrevocable trust?
If it is an irrevocable trust, do you know for sure whether or not the assets in it will be included in your mother's estate?

The reason the exact nature of the "family trust" matters is because it could well determine whether the Exxon stock will get a step-up in basis upon your mother's death. If there isn't going to be a step up in cost basis, then that generally changes one's calculations on how much to tolerate single stock risk in the portfolio of a well-off elder. (The tactic of donating highly appreciated assets to charity would probably also be off the table if the assets were an irrevocable trust.)

If she inherited it 1991 or earlier ... and given that you are calling it a "family trust" rather than a "living trust" ... I'm suspecting a distinct possibility that this trust may be an irrevocable trust that came into being upon the death of her parents (or other relative of earlier generation)?***



***The estate tax deduction was much lower than now in the late1980s/early1990s ($600,000) and had been significantly lower than that for many decades previous (between $40,000 and $100,000 from 1916-1976). I don't think it was uncommon for estate planning attorneys in that era to recommend that people (e.g. your mother's parents) set up an irrevocable "generation skipping" trust (to go into effect upon their deaths). The purpose was give the next generation (your mother) some access to the inheritance (e.g. income, some principal under some conditions) while keeping the assets out of the next generation's estate (thereby shielding them from estate tax in your mother's generation). But, "keeping it out of your mother's estate" would also equal "no step up in basis".

Source: (IRS website) History of estate tax exemption and rates , 1916 - 2007, p. 122, https://www.irs.gov/pub/irs-soi/ninetyestate.pdf

rossington
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Re: Best Option to Sell Long Held Individual Stock

Post by rossington » Mon Oct 14, 2019 12:08 pm

Even if the stock is in an irrevocable trust the "worst" that would happen is that the beneficiaries would have their own individual share lots at the original basis. Thus each beneficiary could manage any cap gains on an individual level. IF the dividends were reinvested then the basis calculations become more complex.
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Re: Best Option to Sell Long Held Individual Stock

Post by Clarice » Mon Oct 14, 2019 1:42 pm

Surprised no one suggested selling covered calls. Earn some income to offset the tax bite.

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Re: Best Option to Sell Long Held Individual Stock

Post by grabiner » Mon Oct 14, 2019 3:44 pm

Clarice wrote:
Mon Oct 14, 2019 1:42 pm
Surprised no one suggested selling covered calls. Earn some income to offset the tax bite.
I made the opposite suggestion, buying puts, because that does a better job of reducing the risk. Writing a covered call gives you some income (the value of the call), but caps the upside. Buying a put costs you some income, but caps the downside. The covered call does also have the slight risk that the holder might exercise it, forcing you to sell the stock for a capital gain.

However, if I understand the tax law correctly (check with your tax advisor), writing a covered call may have some tax advantages. If you write a covered call which is not deep in the money, and have to buy it back for a loss because the stock price rose, you can deduct the capital loss. If you buy a put against stock you already own, this creates a straddle, and any capital loss on the put is deferred until you clear the straddle (by selling the stock). In the case of the OP's mother, who intends to hold the stock until her death, any capital gains on puts would be taxable, but capital losses would probably expire only when she does.

In addition, when trading options, check with your tax advisor to ensure that your options transactions are not treated as constructive sales (for example, writing a call and buying a put at the same price is economically equivalent to selling the stock, and trading an option which is deep in the money could be considered equivalent to a sale), and check whether any losses on options create wash sales with other options.
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Re: Best Option to Sell Long Held Individual Stock

Post by Clarice » Mon Oct 14, 2019 4:02 pm

grabiner wrote:
Mon Oct 14, 2019 3:44 pm
Clarice wrote:
Mon Oct 14, 2019 1:42 pm
Surprised no one suggested selling covered calls. Earn some income to offset the tax bite.
I made the opposite suggestion, buying puts, because that does a better job of reducing the risk. Writing a covered call gives you some income (the value of the call), but caps the upside. Buying a put costs you some income, but caps the downside. The covered call does also have the slight risk that the holder might exercise it, forcing you to sell the stock for a capital gain.

However, if I understand the tax law correctly (check with your tax advisor), writing a covered call may have some tax advantages. If you write a covered call which is not deep in the money, and have to buy it back for a loss because the stock price rose, you can deduct the capital loss. If you buy a put against stock you already own, this creates a straddle, and any capital loss on the put is deferred until you clear the straddle (by selling the stock). In the case of the OP's mother, who intends to hold the stock until her death, any capital gains on puts would be taxable, but capital losses would probably expire only when she does.

In addition, when trading options, check with your tax advisor to ensure that your options transactions are not treated as constructive sales (for example, writing a call and buying a put at the same price is economically equivalent to selling the stock, and trading an option which is deep in the money could be considered equivalent to a sale), and check whether any losses on options create wash sales with other options.
Thank you - been wondering about tax implications of options, as I heard recently that futures were taxed oddly which surprised me.

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Re: Best Option to Sell Long Held Individual Stock

Post by inbox788 » Mon Oct 14, 2019 7:08 pm

Big Jim24 wrote:
Sun Oct 13, 2019 2:40 pm
The Exxon stock is in a family trust and will be passed on to my siblings and I at some time in the future (she's in great health and I think she will make it to the century mark and beyond). She likely has enough other assets that she should never need to sell the stocks, but wants to see if there are any ways she can get out of the stock (all or partial) to get lessen the volatility of her portfolio, without taking a big tax hit. Is there any way that she can convert it to anything else?
Simplest solution is to make sure the trust will have a step up basis and inherit it. You take a chance on a single stock, but it's one of the less risky ones, IMO. Deets on the trust and who control it?

You might look into pooled income funds or CRTs. You might be able to draw up to 50 percent in some cases, and the minimum 10% charitable remainder may be less than the taxes you would owe with immediate tax benefit.

https://www.bogleheads.org/wiki/Charita ... ncome_fund
https://www.fidelitycharitable.org/guid ... funds.html

https://www.bogleheads.org/wiki/Charita ... nder_trust
https://www.estateplanning.com/Understa ... er-Trusts/

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Re: Best Option to Sell Long Held Individual Stock

Post by Northern Flicker » Mon Oct 14, 2019 11:05 pm

What is her marginal rate for state income taxes, if any? If that is low, or there is no income tax in her state, then she may be able to focus on managing the federal tax bill by splitting up the sales over multiple years. Such a plan may only add a very small tax bite, depending on her federal bracket for long-term capital gains, and would be worth it to diversify the concentration risk. Volatility aside, you have to look no further than GE to see what can happen to one of the largest and most solid companies when idiosyncratic risk materializes.
Index fund investor since 1987.

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Big Jim24
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Re: Best Option to Sell Long Held Individual Stock

Post by Big Jim24 » Tue Oct 22, 2019 2:35 pm

OP here. Thanks for all of your wisdom. Mom's house is currently on the market, so I'll get to this issue after the sale. The house is currently taking up all of her bandwidth. I'll definitely have her turn off dividend reinvestment when we can.

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Big Jim24
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Re: Best Option to Sell Long Held Individual Stock

Post by Big Jim24 » Sun Dec 01, 2019 11:18 pm

OP - Do you have more information on whether this "family trust" is a revocable living trust or an irrevocable trust?
If it is an irrevocable trust, do you know for sure whether or not the assets in it will be included in your mother's estate?
It's a revocable trust. The stocks were inherited from her parents, and I'm not certain how they were held before my parents put it into their trust (my father passed in 2006). The assets in the trust are to be split equally between my 2 siblings and I.
Last edited by Big Jim24 on Sun Dec 01, 2019 11:32 pm, edited 1 time in total.

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Big Jim24
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Re: Best Option to Sell Long Held Individual Stock

Post by Big Jim24 » Sun Dec 01, 2019 11:30 pm

Forgot to add - she files 2 tax returns. One for the trust, with income from dividends and that will come to about $40,000 this year, and a "regular" return from her pension income of $78,000.

lakpr
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Re: Best Option to Sell Long Held Individual Stock

Post by lakpr » Mon Dec 02, 2019 10:44 am

@ Big Jim24,

The Tax Cuts and Jobs Act has made up to $2200 of unearned income for kids non-taxable. If there are any kids below age 18, or kids above that age but can be claimed as dependents on their parents' returns -- can those kids be gifted some specific lots of her Exxon stock, and kids sell them immediately each incurring no more than $2200 in capital gains? An early inheritance of some sort. If that $2200 threshold is breached, though, the unearned income gets taxed at Trust tax rates which are much higher

Not a tax expert ... so please be sure to research this suggestion deeper for your own case.

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