The Methodical Compendium of Concentrated Portfolio OptionsManaging Concentrated Stock Wealth, Second Edition is the adviser's guide to skillfully managing the risk and opportunity presented by concentrated stock holdings. Written by Tim Kochis, a recognized leader in financial planning, this book walks you through twenty strategies for managing concentrated stock wealth. Each strategy equips you with the tools and information you need to preserve and grow your clients' wealth. Supported with examples from the author's forty years of experience, this practical resource shows you the available options, the best order for clients to review those options, and the reasons why some options are better than others. Kochis addresses common obstaclessuch as securities law, taxes, and psychological resistanceand shows you the strategies and execution to prevail.
This new second edition includes:Updated references, calculations, and illustrations regarding the latest tax lawsRevised coverage of derivatives strategies and more examples of potential blind spotsTactics to convince some clients to diversify their portfolios and optimize their wealthTechniques to exploit concentration in pursuance of greater wealth
They say that you should never put all of your eggs in one basket, but compensation packages, inheritances, IPOs, buyouts, and other situations leave many investors holding a significant portion of their wealth in one stockoften leaving their portfolios in a dangerous position.Managing Concentrated Stock Wealth, Second Edition shows you how to manage the risks and turn a precarious position into an advantage.
Foreword xiii
Acknowledgments xvii
Introduction xix
Getting the Priorities Straight xix
Knowing the Client xxi
Chapter Note xxiii
Part I: Sales
Chapter 1 Constraints on Managing Concentration Risk 3
Taxes 4
PreIPO Illiquidity 8
PostIPO Lockups and Other Market Considerations 8
SEC Constraints, the SarbanesOxley Act, and DoddFrank 10
Notice and Reporting 10
Controlled Sales of Founder Stock 11
No Trading on Material, Nonpublic Information 11
No ShortSwing Profits for Corporate Insiders 11
No Favorable Financing for Senior Executives 12
Employment/Career Constraints 12
Psychological Barriers 14
Chapter Notes 17
Chapter 2 Sale and Diversification 19
Overcoming the Tax Constraint 21
Overcoming Psychological Barriers 24
ESOP Sales 25
PreIPO Considerations 26
Lets Just Sell It 27
Chapter 3 Coordinating Long Shares with Stock Options 29
Employee Stock Options 30
Taxes on Options 32
Exercise Strategies 35
Swapping 40
Option Leverage 40
Long Shares: No Leverage 42
Ordering Rule 42
Chapter Note 43
Chapter 4 Diversification Sales and DeferredCompensation Plans 45
Deferred Compensation: Then and Now 46
Sweetening the Pot 47
Risks and Returns 48
The Rabbi Trust 51
Investment Options 52
The Benefits of Deferral 52
The Coins Two Sides 54
Chapter 5 An Out for Insiders 55
SEC Rule 10b51 Plans 56
ThirdParty Discretion 57
Formula Plans 57
ShortSwing Constraints 58
Sales During RetirementPlan Blackout Periods 58
Plan Logistics 58
Prearranged Plans: Often a Corporate Requirement 59
Appendix XYZ Co. Nondiscretionary Rule 10b51 Sales Plan 59
Chapter 6 Restricted Stock: Tackling Temptation 67
Managing the Section 83(b) Election 68
All That Glitters 69
Risk of Forfeiture 71
Opportunity Cost 72
A SecondBest Strategy 74
Seeing the Light 75
Complications for Insider 76
The Right Fit 77
Chapter Note 80
Appendix 80
Part II: Gifts
Chapter 7 Gifts to Family 85
Transfer Taxes 85
Income Tax Leverage 89
Special Rules on Employer Stock 90
Transfer Structures 90
Gifts Under the Uniform Transfers to Minors Act 91
Minors Trust 91
Intentionally Defective Grantor Trusts 92
Family Limited Partnerships 94
Gaining Psychic Distance 95
Chapter 8 Nonqualified Stock Options: Gifts to Family 97
Investment Leverage 98
Tax Leverage 99
Timing and Valuation 100
Chapter 9 Gifts to Charity 105
Tax Savings 105
The Cost of Charitable Gifts 107
Special Income Tax Considerations 109
Loss Positions 109
ShortTerm Gains 109
Seasoned Incentive Stock Option Stock 110
LowBasis Shares 110
IRA Assets 111
Tangible Personal Property 111
Structures for Charitable Gifts 112
Direct Gifts 112
DonorAdvised Funds 112
Private Foundations and Supporting Organizations 114
A Word of Caution 115
Appendix: Key Characteristics of Charitable Vehicles 116
Chapter 10 Charitable Trusts 119
The Charitable Remainder Trust 120
Tax Requirements and Opportunities 121
Tax Deferral 122
Coordinating a CRT with the Clients Financial Plan 123
The Charitable Lead Trust 125
Chapter 11 Nonqualified Stock Options: Gifts to Charity 129
The Charitable Gift 130
Mismatches of Valuation and Timing 131
Why Bother? 132
Charities Close to Home 133
The Wealth Effect 134
Part III: Retention
Chapter 12 Margin: An Acquired Taste 137
Margined Diversification 138
Logistics 138
Margin and Liquidity 140
Reduced Risk 141
Enhanced Return 141
The Unexpected 145
Margin Calls 147
Chapter Notes 148
Chapter 13 Managing Concentration Through an Index Proxy 149
Tax Management 149
The IndexProxy Account 150
Managing Concentration Risk 151
Limitations and Drawbacks 153
AssetClass Limitations 153
Tracking Error 153
Higher Expenses 154
Deferred Tax Liability 154
Chapter 14 Exchange Funds 157
By Invitation Only 157
Costs and Benefits 158
The Future of Exchange Funds 160
Stock Protection Funds 160
Chapter Notes 162
Chapter 15 Derivatives and Hedges: Buying Time 163
The Versatile Hedge 164
Selling Calls 164
Changing a Mindset 165
Buying Puts 168
Collars 170
The PutSpread Collar 171
Tax Consequences of Derivatives 171
The Forward Contract 172
A Competitive Market 174
Chapter 16 Powers of Concentration 175
Embracing Risk 175
Corporate StockHolding Requirements 177
Stock Options: The Decision to Hold 179
The GoldenParachute Constraint 180
Capturing Dividends 181
Change in Tax Rates 181
Incentive Stock Options and the Alternative Minimum Tax 182
Gifts of Options 183
Charitable Lead Trust 184
Company Stock in IRAs or Qualified Retirement Plans 184
The Control Premium 186
Chapter Note 188
Afterword 189
About the Author 193
About the Contributing Author 195
Index 197
