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Managing Concentrated Stock Wealth: An Advisor's Guide to Building Customized Solutions, 2nd Edition



"We learned a great deal from reviewing this work! The book not only gives a wonderful technical explanation, but perhaps even more importantly, it shares real world tradeoffs and some of the behavioral traps that are seldom addressed in the technical literature. Managing Concentrated Stock Wealth presents a great guide for optimizing the complex world of concentrated positions: whether to reduce the risk—or to cultivate the opportunity—that these very common situations present."
—Mark Balasa and Armond Dinverno, Co-CEO's, Balasa Dinverno Foltz, LLC

"This book is an outstanding resource for financial advisors, but is also a must for their clients. My family and I have benefited greatly as a result of our work with Tim and his associates. Together, we've made excellent decisions for our future, including, of course, making smart moves about concentrated stock positions I was fortunate to have."
—G. Kirk Raab, former President & COO, Abbott Labs and former President & CEO, Genentech; currently at work with a number of pre-public and newly public Biotech companies

"Like an expert partner sitting on your shelf, Tim Kochis's book is just waiting to navigate you through your client's concentrated stock issues. Tim has a talent for taking complicated information and synthesizing it into understandable and actionable strategies. He's my favorite resource, always willing to share his knowledge and experience, and this book is one of his best."
—Deena Katz, CFP®, Associate Professor, Texas Tech University

"Concentrated stocks represent both the most frequent source of wealth creation and one of the biggest risks of wealth destruction for entrepreneurs. While the first half of the statement is obvious, the second needs an explanation: over-extending one's welcome in a single, concentrated stock position can lead to material losses if market or company developments bring the price of the security down sharply. Tim Kochis's book is a wonderful and almost indispensable guide to the pitfalls that must be avoided and the possible solutions that should be contemplated. Though individuals will always want to consult with the appropriate specialists to ensure that any solution is appropriate for their own circumstances, starting with a careful read of the book should help them have a much more informed dialog with these specialists."
—Jean Brunel, Managing Principal, Brunel Associates; editor, The Journal of Wealth Management

"Dealing with the wide variety of issues that come together when working with clients with concentrated stock positions is a challenge for advisors and clients. In Managing Concentrated Stock Wealth, Tim and Michael set out a sequence of strategic solutions that are easy for the advisor to present and for the client to grasp. Every advisor needs this excellent resource that is full of current and relevant information on this topic. And every client faced with the choices of selling, transferring, hedging, retaining, or even accumulating more of a concentrated position needs an advisor who has mastered it."
—Lyle K. Benson, Jr., CPA/PFS, CFP®, L.K. Benson & Company

TIM KOCHIS is the CEO of Kochis Global, a firm he founded to advance best-in-class wealth management and investment planning services, especially in the emerging economies of Asia. He pioneered the independent model in the U.S. financial services industry, chaired every professional organization in his field, received every achievement award his profession confers over more than 40 years, and directly provided personal financial planning services to thousands of clients at Bank of America, Deloitte, and Aspiriant.

MICHAEL J. LEWIS is the Director of Wealth Strategies at Vernal Point Advisors. Michael previously worked at Aspiriant from 2008–2015, where he served as a wealth manager for high net worth and family office clients, and was deeply involved in developing the firm's systems and intellectual property. At Vernal Point Advisors, Michael focuses on areas of concentrated wealth management, executive compensation optimization, and family office services.

Foreword xiii

Acknowledgments xvii

Introduction xix

Getting the Priorities Straight xix

Knowing the Client xxi

Chapter Note xxiii


CHAPTER 1 Constraints on Managing Concentration Risk 3

Taxes 4

Pre-IPO Illiquidity 8

Post-IPO Lockups and Other Market Considerations 8

SEC Constraints, the Sarbanes-Oxley Act, and Dodd-Frank 10

Notice and Reporting 10

Controlled Sales of “Founder Stock” 11

No Trading on Material, Nonpublic Information 11

No “Short-Swing” 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

Pre-IPO Considerations 26

Let’s 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 Deferred-Compensation 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 Coin’s Two Sides 54

CHAPTER 5 An Out for Insiders 55

SEC Rule 10b5-1 Plans 56

Third-Party Discretion 57

Formula Plans 57

Short-Swing Constraints 58

Sales During Retirement]Plan Blackout Periods 58

Plan Logistics 58

Prearranged Plans: Often a Corporate Requirement 59

Appendix XYZ Co. Nondiscretionary

Rule 10b5-1 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 Second-Best Strategy 74

Seeing the Light 75

Complications for Insider 76

The Right Fit 77

Chapter Note 80

Appendix 80


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

Minor’s 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

Short-Term Gains 109

Seasoned Incentive Stock Option Stock 110

Low-Basis Shares 110

IRA Assets 111

Tangible Personal Property 111

Structures for Charitable Gifts 112

Direct Gifts 112

Donor-Advised 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 Client’s 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


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 Index-Proxy Account 150

Managing Concentration Risk 151

Limitations and Drawbacks 153

Asset-Class 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 Put-Spread 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 Stock-Holding Requirements 177

Stock Options: The Decision to Hold 179

The Golden-Parachute 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