Tax efficient way to convert single stock position to index fund

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passiverisktaker
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Tax efficient way to convert single stock position to index fund

Post by passiverisktaker »

Hi All,

I am overly invested in a single stock (almost 50% of my portfolio). I have held the stock for more than 10 years. If sold outright I would owe lots in capital gains. I do not need the money but want to reduce the exposure and risk. I anticipate retiring in 10 years and then tap into the investment.

I have been advised that it is possible to put everything in a trust (am in Florida) and can then use some custom funds to move from single stock to a more balanced portfolio. But I can't find any reliable transparent information from reputable sources on this.

Would really appreciate if the knowledgeable folks on this forum can advise on a tax efficient way to reduce the exposure and risk of owning large portion of your portfolio in a single stock.

thanks.
mhalley
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Re: Tax efficient way to convert single stock position to index fund

Post by mhalley »

Paying taxes is good, means you made money. Unless you put it in a charitable trust or daf, I don’t think putting it in a trust eliminates the capital gains.
https://finance.zacks.com/happens-cost- ... 10577.html
I would figure out how much you are willing to pay in taxes each year and sell that many share yearly.
Gill
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Re: Tax efficient way to convert single stock position to index fund

Post by Gill »

passiverisktaker wrote: Fri Oct 16, 2020 5:39 pm I have been advised that it is possible to put everything in a trust (am in Florida) and can then use some custom funds to move from single stock to a more balanced portfolio. But I can't find any reliable transparent information from reputable sources on this.
At one time it was permissible to deliver a single holding to a fund and receive shares of the diversified fund in a tax free exchange.This was plugged in the tax law some time ago.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
sport
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Re: Tax efficient way to convert single stock position to index fund

Post by sport »

If you have any other holdings that you can sell at a loss, you can sell enough with gains to offset the loss thus owing no taxes.
sport
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Re: Tax efficient way to convert single stock position to index fund

Post by sport »

If you make donations to charities, you can give appreciated shares instead of cash. Then use that cash for investing as you choose. For shares held more than one year, the appreciated value is a deductible item and you pay no tax on the gains.
illumination
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Re: Tax efficient way to convert single stock position to index fund

Post by illumination »

I don't know the details, but my understanding is that you can use shares in a single company to join an exchange fund that's pooled with others. There's all sorts of stipulations on it along with high fees. Similar to how you can sell real estate and do a 1031 into a REIT.

It really sounds like it's one of those things where you need like 7 figures in a single stock before it makes sense. Probably not a "Boglehead" move but for someone who had a crazy amount in a single stock, might make sense.


https://www.barrons.com/articles/the-ta ... 1560794410
000
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Re: Tax efficient way to convert single stock position to index fund

Post by 000 »

One could buy protective put options to secure the position while unwinding it. Of course there is a premium for this.

My understanding (not a tax expert) is that once a stock hits LTCG, buying protective puts does not change that, but if you buy protective puts on a stock with short term capital gains, it restarts the STCG clock.
Gill
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Re: Tax efficient way to convert single stock position to index fund

Post by Gill »

illumination wrote: Fri Oct 16, 2020 6:51 pm I don't know the details, but my understanding is that you can use shares in a single company to join an exchange fund that's pooled with others. There's all sorts of stipulations on it along with high fees. Similar to how you can sell real estate and do a 1031 into a REIT.

It really sounds like it's one of those things where you need like 7 figures in a single stock before it makes sense. Probably not a "Boglehead" move but for someone who had a crazy amount in a single stock, might make sense.


https://www.barrons.com/articles/the-ta ... 1560794410
See my post above. This is no longer permitted.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Longdog
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Re: Tax efficient way to convert single stock position to index fund

Post by Longdog »

If you regularly donate to charity (and I hope you do!), then instead of donating cash to the charity, donate some of the appreciated shares, and simultaneously take the cash you would have otherwise donated to the charity, and use it to buy the index fund of your choice. A similar maneuver can be done using a donor advised fund (DAF), and in that case you can donate several years worth to the DAF, and then year after year, use the DAF as your source for charitable contributions.
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David Jay
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Re: Tax efficient way to convert single stock position to index fund

Post by David Jay »

passiverisktaker wrote: Fri Oct 16, 2020 5:39 pm...but want to reduce the exposure and risk.
You have to make a decision how much you are willing to pay to reduce exposure and risk. I certainly wouldn't want to enter retirement with 50% of my assets in one stock. I would take a look at selling a little bit (maybe to the top of your current tax bracket) each year for the next 10 years. Maybe get it down to 20 or 30%. That is still high but it would let me sleep at night.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Silverado
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Re: Tax efficient way to convert single stock position to index fund

Post by Silverado »

No one seems to have mentioned it yet, but for sure turn off any dividend reinvestment.
illumination
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Re: Tax efficient way to convert single stock position to index fund

Post by illumination »

Gill wrote: Fri Oct 16, 2020 7:09 pm
illumination wrote: Fri Oct 16, 2020 6:51 pm I don't know the details, but my understanding is that you can use shares in a single company to join an exchange fund that's pooled with others. There's all sorts of stipulations on it along with high fees. Similar to how you can sell real estate and do a 1031 into a REIT.

It really sounds like it's one of those things where you need like 7 figures in a single stock before it makes sense. Probably not a "Boglehead" move but for someone who had a crazy amount in a single stock, might make sense.


https://www.barrons.com/articles/the-ta ... 1560794410
See my post above. This is no longer permitted.
Gill
What year was the change? The article from Barrons was from 2019. Was there a change in the law after this?
clown
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Re: Tax efficient way to convert single stock position to index fund

Post by clown »

With all due respect to the previous responders, I recommend consulting a tax attorney in Florida to see what is permitted under Florida law. Previous responders may be from other states so their expertise may not be applicable to your situation. Buying an hour of attorney time is probably money well spent. As opposed to an attorney, an Enrolled Agent may be a less expensive choice. Although EAs know the IRS rules inside out, they may not be up to speed with Florida state law. Worth exploring, in my view.
LFS1234
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Re: Tax efficient way to convert single stock position to index fund

Post by LFS1234 »

passiverisktaker wrote: Fri Oct 16, 2020 5:39 pm Hi All,

I am overly invested in a single stock (almost 50% of my portfolio). I have held the stock for more than 10 years. If sold outright I would owe lots in capital gains. I do not need the money but want to reduce the exposure and risk. I anticipate retiring in 10 years and then tap into the investment.

I have been advised that it is possible to put everything in a trust (am in Florida) and can then use some custom funds to move from single stock to a more balanced portfolio. But I can't find any reliable transparent information from reputable sources on this.

Would really appreciate if the knowledgeable folks on this forum can advise on a tax efficient way to reduce the exposure and risk of owning large portion of your portfolio in a single stock.

thanks.
Gill writes that these arrangements no longer are permitted. In the article linked upthread, Barrons wrote (in 2019) that they are. Both are highly credible sources. Noting that the exchange fund arrangements Barrons describes entail lots of caveats including a 7-year lockup (you may be able to get out early by paying a penalty) and a requirement that at least 20% of the fund be in illiquid investments, it sounds like the only two firms now creating such funds, Goldman Sachs and Eaton Vance, may have found a permitted way to do something which generally no longer is permitted.

I looked into something like this decades ago, and my number one reservation at the time was adverse selection. People who believe their concentrated stock positions are undervalued are relatively unlikely to participate in this type of arrangement. People who believe that their concentrated stock positions are grossly overvalued will be desperate to take advantage of this type of arrangement. Consequently, I would expect the average results of these pools to be unsatisfactory even before taking into account the facilitators' fees, which most likely are high.

OP is in Florida, where there is no state level income tax. The capital gains brackets are 0%, 15%, 20% and 23.8% (including NIIT). This means that even in the worst-case tax scenario, OP's glass would be 76.2% full and only 23.8% empty, while attaining maximum flexibility as far as reinvestment options are concerned, and paying zero fees to anyone. This is a pretty good deal. Depending on the size of the investment and the speed at which OP wants out, even more favorable tax treatment can be obtained by spreading out sales over a number of years.

My general experience has been that there are times when it makes sense just to bite the tax bullet, rather than getting tied up in limiting and expensive "tax-advantaged" solutions. For high income people in high-tax CA or NY the calculus may be different, but for those who can stay in the 15% - 23.8% bracket, my general default attitude is to pay the taxes and move on.
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Re: Tax efficient way to convert single stock position to index fund

Post by Gill »

illumination wrote: Fri Oct 16, 2020 7:53 pm
Gill wrote: Fri Oct 16, 2020 7:09 pm
illumination wrote: Fri Oct 16, 2020 6:51 pm I don't know the details, but my understanding is that you can use shares in a single company to join an exchange fund that's pooled with others. There's all sorts of stipulations on it along with high fees. Similar to how you can sell real estate and do a 1031 into a REIT.

It really sounds like it's one of those things where you need like 7 figures in a single stock before it makes sense. Probably not a "Boglehead" move but for someone who had a crazy amount in a single stock, might make sense.


https://www.barrons.com/articles/the-ta ... 1560794410
See my post above. This is no longer permitted.
Gill
What year was the change? The article from Barrons was from 2019. Was there a change in the law after this?
Upon further reflection and a little bit of research, it seems I am speaking of the older "swap funds" or "exchange funds" and Barron's is discussing a newer form with very limited restrictions which is now permissable. The older swap funds, which are no longer allowed, permitted an investor to exchange highly appreciated stock for shares in a diversified mutual fund which could then be sold with no restrictions. The newer form is not nearly as attractive and has restrictions including the receipt of non publicly traded securities which would make it unappealing to most investors and probably also the OP. I don't feel qualified to discuss these at length but I now see why our statements differed.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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Re: Tax efficient way to convert single stock position to index fund

Post by grabiner »

Longdog wrote: Fri Oct 16, 2020 7:16 pm If you regularly donate to charity (and I hope you do!), then instead of donating cash to the charity, donate some of the appreciated shares, and simultaneously take the cash you would have otherwise donated to the charity, and use it to buy the index fund of your choice. A similar maneuver can be done using a donor advised fund (DAF), and in that case you can donate several years worth to the DAF, and then year after year, use the DAF as your source for charitable contributions.
And if you want to donate only part of the stock to charity, donate the lowest-basis shares to charity and sell the highest-basis shares. You might well be able to donate half the stock and get rid of 3/4 of the capital gain.
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passiverisktaker
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Re: Tax efficient way to convert single stock position to index fund

Post by passiverisktaker »

Hi Everybody,

First and foremost, thank you everybody for really detailed and pertinent information and suggestions. I am summarizing it for future reference.

Problem Statement: How to reduce the exposure and risk of a portfolio that is not balanced and is weighted heavily towards a single stock that has accumulated considerable capital gains.
  • Sell appropriate portions as per my desire every year and buy index funds.
  • Monitor losses from other parts of the portfolio and sell appropriate amount of shares that offset the gains with those losses.
  • Leverage charity donations and use these shares instead of cash for that
  • Potentially explore couple of firms who may allow one to put these shares in the pool to limit the exposure risk. This comes with lots of caveats.
  • People also pointed out that it impacts only X% of the total value of the portfolio as it is based on capital gains which is less than ordinary income.
Again thank you for all the suggestions and help. I will post an update based on further inputs that are received.
retiredjg
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Re: Tax efficient way to convert single stock position to index fund

Post by retiredjg »

passiverisktaker wrote: Thu Oct 22, 2020 10:59 pm [*]Monitor losses from other parts of the portfolio and sell appropriate amount of shares that offset the gains with those losses.
The losses must also be in your taxable account. Losses in an IRA or 401k would not offset the gains.
mr_brightside
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Re: Tax efficient way to convert single stock position to index fund

Post by mr_brightside »

mhalley wrote: Fri Oct 16, 2020 6:22 pm Paying taxes is good, means you made money. Unless you put it in a charitable trust or daf, I don’t think putting it in a trust eliminates the capital gains.
https://finance.zacks.com/happens-cost- ... 10577.html
I would figure out how much you are willing to pay in taxes each year and sell that many share yearly.
i would pay the LT capital gain (~15%) and move it over to a VTI-type fund asap. exposure of so much risk to a single stock would keep me awake at night (see my signature line)

even if the trust angle is possible -- now you start getting lawyers / agents / advisors involved which of course comes at a $$ cost both now and future as well as in terms of overall simplicity. personally -- I like to minimize variables and expense while maintaining flexibility and simplicity

consider a portion of the tax the cost of success --- congrats on having a 'good problem'

-----------------------------------
remember Enron?? I do
JimmyJammy
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Re: Tax efficient way to convert single stock position to index fund

Post by JimmyJammy »

Is that single stock, by chance, Amazon? Because in my case it sure is!
lakpr
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Re: Tax efficient way to convert single stock position to index fund

Post by lakpr »

If you have kids you might be able to gift shares to them, then have them sell to realize capital gains at 0% rate up to $2200 in gains per year. The money is of course the kid's, you can't have him/her gift it back (step transaction doctrine), but if there are college expenses you are paying or will be paying, this could be a way of lessening the tax bite.
Outer Marker
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Re: Tax efficient way to convert single stock position to index fund

Post by Outer Marker »

What is your long term capital gains rate?

The risk of holding a single stock and the potential market decline likely far outweighs the relatively low capital gains rate.

In addition, capital gains rates are likely lower now than they will be in the future.

I'd sell now, pat myself on the back for making a good, lucky pick, and diversify your holding as you wisely want to do.
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Re: Tax efficient way to convert single stock position to index fund

Post by bertilak »

lakpr wrote: Sat Oct 24, 2020 6:48 am If you have kids you might be able to gift shares to them, then have them sell to realize capital gains at 0% rate up to $2200 in gains per year.
That is what I do.
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afan
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Re: Tax efficient way to convert single stock position to index fund

Post by afan »

lakpr wrote: Sat Oct 24, 2020 6:48 am If you have kids you might be able to gift shares to them, then have them sell to realize capital gains at 0% rate up to $2200 in gains per year. The money is of course the kid's, you can't have him/her gift it back (step transaction doctrine), but if there are college expenses you are paying or will be paying, this could be a way of lessening the tax bite.
OP was talking about having money for retirement. Giving it away would not help for that goal.

Selling some each year might be very good, depending on the tax rate that would be paid.

Puts cost money. If this is a highly volatile stock, maybe it would be worth it. For something that is unlikely to completely crater over the next 5-10 years, the solution might be worse than the problem.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
lakpr
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Re: Tax efficient way to convert single stock position to index fund

Post by lakpr »

afan wrote: Sat Oct 24, 2020 12:18 pm
lakpr wrote: Sat Oct 24, 2020 6:48 am If you have kids you might be able to gift shares to them, then have them sell to realize capital gains at 0% rate up to $2200 in gains per year. The money is of course the kid's, you can't have him/her gift it back (step transaction doctrine), but if there are college expenses you are paying or will be paying, this could be a way of lessening the tax bite.
OP was talking about having money for retirement. Giving it away would not help for that goal.

Selling some each year might be very good, depending on the tax rate that would be paid.

Puts cost money. If this is a highly volatile stock, maybe it would be worth it. For something that is unlikely to completely crater over the next 5-10 years, the solution might be worse than the problem.
I don't disagree with that, but ...

Money is fungible. If the OP has kids, and he is in the 24%+ tax bracket (sounds like it from the original post), and if the kid is going to college (assumption in my post you quoted above), then the OP is going to incur those costs ANYWAY, as the likelihood of 'aid' is low to very low. Just because "this pot of money" is designated for retirement, does not mean it cannot be tapped for college expenses. Say the OP might be funding a 529 plan; that funding can be stopped, OR sell this stock in small chunks to annually fund the 529, and use the money that would have gone for 529 plan toward investing in VTSAX. Say the OP's retirement plan might be offering Mega Backdoor Roth that he's not taking advantage now. Max that out, and make up the shortfall by selling this stock.

In the examples above, the "retirement" is still funded. It is the OTHER expenses/funding priorities that are being filled by slowly selling the stock in bits and pieces. View this stock as an unwanted gift card to a store that you don't usually shop at, and one that you KNOW marks up by 15% on goods sold elsewhere. How to take max advantage of the gift card without actually completely foregoing the value on the card ...
SnowBog
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Re: Tax efficient way to convert single stock position to index fund

Post by SnowBog »

I gift appreciated shares to a UTMA for child's education. You can select which shares to gift, thus letting you give more or less overall while still staying within the "kiddie tax" limits.

I also turned off dividend reinvestments, and if you are still getting new shares such as through an ESPP or stock grants from your employer, make sure you sell those immediately to prevent the "problem" from getting worse.

In my case, even doing this, plus growing my portfolio via investments in other holdings, was not outpacing the gains on my concentrated position. (Arguably a good problem to have while in the way up... But that wasn't lowering my risk...) So I ended up setting a plan to unwind more aggressively.

I started with selling about 25% of my shares, those with the least gains in early February. Had my crystal ball been working, I'd have waited and done so during the downturn in late Feburary/March. But the TLH opportunities did help offset some of those gains. But I had already decided it needed to be done, and was committed to pay the taxes to lower my concentration risk.

My plan for next year WAS to sell another 25% (of my remaining balance), which have higher gains (since they are older). This is less shares, but roughly the same tax costs.

However, as I've stated to look at taxes for 2020, I'll probably amend my plan for 2021. Same general idea, but I'll adjust the amount based on other earnings and tax brackets to attempt to keep from pushing me into a higher tax bracket. (I ended up having higher earnings this year than expected when I sold, might end up getting pushed into a higher tax bracket. Ideally, I'll avoid that next year.)
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