One of our clients was a senior executive at a publicly traded company. Due to the restricted and common stock he owned because of his employment, he found himself in a very concentrated, and potentially risky position in managing financial assets. Unsure of the best approach to reduce his reliance on this company stock, he felt the need to hire a wealth management advisor to help reduce his exposure. He engaged Morgan Rosel’s investment advisors for assistance in developing a financial investment strategy to diversify his portfolio.
Restricted stock is a common form of equity compensation. There are many rules and regulations that must be followed when trading restricted stock including blackout periods and strict vesting schedules. In addition, restricted stock has nuances with how the government taxes gains which needs to be fully understood to minimize taxation.
Over the years, we’ve seen people lose millions of dollars because they had too much of their wealth tied up with their employer’s stock. We didn’t want that to happen to our client.
As his wealth management advisor, Morgan Rosel carefully analyzed the equity compensation plan alongside his financial plan and risk profile. We ran tax strategy modeling tailored to the complexity of this particular client’s benefits package and needs. During our analysis we considered structuring costless collars (also known as a zero-cost collar) and the purchase of put options in order to protect him in the event this company’s stock took a nose dive.
After careful evaluation of all the various options taken in context with his unique situation, we decided to sell the stock at regular intervals and diversify his portfolio to protect against a major downturn. While this created a taxable event for our client, the long-term benefits outweighed the costs. One of the driving factors in the selection of this strategy was the fact that the state our client lived in was offering zero capital gains tax because our client’s stock was domiciled in his home state, and he held the position for 2 years or longer. Thus, with this info in mind, we worked closely with his accountant to strategically sell the restricted stock to diversify his portfolio, maximize gains, and minimize tax burden.
Prior to selling restricted stock a detailed financial analysis should be performed. This process takes time, patience, and expertise to maximize the chances of success. We believe the effort in this client’s case was well worth the time spent. The benefits of the reduction in financial risk caused by overexposure to one company helped him to retire comfortably and maintain his lifestyle with less worry.
Having a compensation structure that includes company stock is, oftentimes, significantly riskier than one would think. Consider this; your paycheck is coming from your company, and you have a large equity compensation package at the same place. In addition, many people participate in the company’s ESOP plan which uses their salary to purchase even more stock! In the event something negative happens to the company, you could lose a significant portion of your income, wealth, and savings – all unnecessarily.
It’s important to work with a wealth manager to develop a strategic divesting plan to unwind your equity compensation benefits and diversify your portfolio. Connect with one of our Denver wealth management advisors today to understand how we can help you manage your equity compensation.
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