Managing Concentrated Stock Positions: A Structural Approach

The Concentration Paradox

Many wealthy families arrived at their current net worth precisely because of concentration — in a business, a stock, or a sector. The very strategy that created the wealth is, by definition, undiversified.

This creates a paradox: the position that represents the family's greatest financial success may also be its greatest financial risk. A single adverse event — a regulatory change, a competitive disruption, a management misstep — can significantly impair a concentrated holding.

Acknowledging this tension is the first step toward thoughtful management.

Why Families Delay Action

Several factors contribute to inertia around concentrated positions:

Tax Drag: For positions with significant unrealized gains, the prospect of a large capital gains tax bill can feel prohibitive. This is a real cost — but it should be weighed against the risk of maintaining an undiversified portfolio.

Emotional Attachment: Founders and executives often have deep personal connections to their company stock. This is entirely natural and should be respected in any planning process.

Optimism Bias: When a stock has performed well, it's psychologically difficult to envision scenarios where it doesn't continue to do so.

Complexity: The intersection of tax law, securities regulation, and estate planning creates genuine complexity that can be paralyzing.

A productive planning conversation addresses all of these dimensions — not just the financial arithmetic.

Structural Approaches

There is no single 'right' answer to managing concentration. However, several structural approaches are well-established and can be tailored to individual circumstances:

Systematic Diversification: Selling a fixed percentage of the position on a regular schedule. This removes the temptation to time the market and creates a disciplined transition path.

Exchange Funds: Pooling concentrated positions with other investors into a diversified fund. This can defer capital gains recognition, though it involves illiquidity and counterparty considerations.

10b5-1 Plans: For public company insiders, pre-programmed trading plans allow systematic sales while managing insider trading compliance requirements.

Charitable Strategies: Donating appreciated shares to donor-advised funds or charitable remainder trusts can eliminate capital gains tax on the donated shares while providing a charitable deduction.

Borrowing Against the Position: Securities-based lending allows access to liquidity without triggering a sale — but introduces leverage risk and margin call exposure.

Options Strategies: Protective puts and collars can provide downside protection while maintaining upside participation. These involve costs and complexity.

Each of these approaches has tradeoffs that should be evaluated in the context of the family's complete financial picture.

The Tax Dimension

Taxes are central to any concentration management strategy. Key considerations include:

• Federal long-term capital gains rates and the net investment income tax • State-level capital gains taxes, which vary significantly by jurisdiction • The step-up in basis at death, which can eliminate unrealized gains • The impact of gifting strategies on basis and gain recognition

The tax code creates both obstacles and opportunities. A well-designed diversification plan integrates tax efficiency at every step — this is precisely where structural alpha applies.

When to Begin

The most common regret we hear from families who have experienced adverse outcomes with concentrated positions is: 'We should have started earlier.'

The optimal time to begin planning is when the position is performing well, the tax environment is favorable, and the family has the luxury of time. Waiting until the position is under pressure — or until liquidity is urgently needed — dramatically reduces the available options.

Our role is to help families understand their options, quantify the tradeoffs using our GPS platform, and develop a plan that reflects their values and objectives — not to pressure anyone into a decision that doesn't feel right.