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Investing

Make the most of your company stock, today and tomorrow

Your company stock position is the bedrock of your wealth.

However, if you won’t need the entire position to achieve your longer-term goals, more immediate—and strategic—opportunities may await you in the areas of family gifting, charitable giving and cash flow management.

Moreover, the strategies below are relevant for corporate insiders and individuals alike:

by:

Kaylin Klinger, Wealth Strategist  

Gift to children

A concentrated position can provide a meaningful solution to achieving gifting objectives, such as leaving money to children—especially if you must continue to hold the concentration to satisfy issues of either public perception or ownership requirements.

Grantor Retained Annuity Trusts (GRATs)

GRATs can help you achieve multiple objectives; more so, if you have a single stock position and expect a substantial increase in its value:

  • Asset appreciation above a predetermined hurdle rate transfers to the next generation free of transfer tax 1
  • Shares held in the GRAT continue to count toward your ownership requirement, thereby satisfying issues of public perception. Plus, the act of entering into a GRAT may send a positive signal to the market

If the stock price declines, and the GRAT fails to pass appreciation to your heirs, you are no worse off than if you had continued to hold those shares on your balance sheet—except for the legal fees incurred to set up and administer the trust.

On the bright side: If the share price declines, you can create a new GRAT with shares at the depressed value, making it more likely that this second effort will be successful.

In the current environment, where the market has pulled back significantly and many companies have seen a decline in their stock prices, starting a GRAT may be especially effective. 

This graphic illustrates how a client could implement a GRAT

View the Text Version

In this hypothetical example, a client put $5 million of company stock into a GRAT for a period of five years. The outcome was a success: During the period, the shares appreciated to an amount above what the client invested plus a hurdle rate, and the excess funds passed to the trust’s beneficiaries free of estate tax. As shown above, the rate of return was 10% and the hurdle rate was 3.6%. The net amount passing to the beneficiaries totaled $927,000. Assuming an effective transfer tax rate of 40%, this is equivalent to $370,800 of transfer tax savings.

Give charitably 

Direct gifts and donor-advised funds (DAFs)

Many of the individuals we work with are checkbook givers (i.e., they give to charities every year, but mostly in the form of cash).

A far more tax-efficient strategy would be to gift appreciated long shares of public company stock. For those with a concentrated position, this technique can be even more powerful, allowing you to:

  • Receive a deduction for the market value of the gift
  • Avoid taxes on embedded gains of the position—a substantial savings
  • Diversify and dispose of the concentrated shares with the highest gain

There are two ways to charitably give concentrated stock: as a direct gift to one or more charities, or more easily, through a DAF (i.e., a charitable investment account set up for the sole purpose of supporting certain charitable organizations)2. Importantly, with a DAF, you receive the tax deduction in the year you make the transfer. However, you don’t need to make charitable distributions from the account in the same year, increasing its flexibility as a charitable giving vehicle.

For corporate insiders, public opinion generally favors transfers made to charity over personal sales, though you should take care to make any gifts to charity during open window periods when they are not in possession of Material Non-Public Information (MNPI)3.

Enhance your cash flow 

There are ways to use a concentrated position to increase your cash flow and at the same time support both your short- and long-term objectives.

Charitable Remainder Trusts (CRTs)

Setting up a CRT is a tax-efficient way to diversify out of the concentrated position while maintaining strong cash flow, as follows: 

  • Transfer a portion of your concentrated position to the trust, which can immediately sell the shares and reinvest the proceeds in a diversified portfolio—without you having to immediately recognize the tax bill
  • Enhance your revenue stream with regular taxable payouts from the trust over a pre-set period, typically 20 years or more. This essentially allows you to spread out the tax liability of the concentration over many years
  • Receive a charitable deduction upon creating the CRT for the forecasted remaining assets, which will go to charity

As with any strategy, there are caveats and concerns to weigh. For example, as an insider, you likely would not consider this strategy until you separated from your company.

Borrow against your position

If you plan to hold on to your public company stock, you likely can lend against the position. This would allow you to maintain your position while funding other goals. 

However, before you implement this strategy, carefully evaluate the amount to borrow as well as the potential for margin calls if the stock declines in value. 

If you are a company insider, also carefully review regulations governing the pledging of shares and whether or not certain public disclosures are required. 

We can help

Concentrated positions have many caveats and nuances, especially for company insiders. Your J.P. Morgan team can help you evaluate how implementing one or more of these strategies may help you achieve your long-term goals.

 

1.Pursuant to Internal Revenue Code 7520, the interest rate for a particular month is the rate that is 120 percent of the applicable federal midterm rate (compounded annually) for the month in which the valuation date falls. That rate is then rounded to the nearest two-tenths of one percent. 
2.There are implications to gifting under Rule 144 for the donor (assuming that the donor is a Rule 144 affiliate). The donor is obligated to aggregate, for purposes of the volume limits of the rule, all of their own sales with those of all of the donees for a period of six months (reporting companies) or one year (nonreporting companies) following each gift. The donor must aggregate all sales during the six-month/one-year period following the gift with all donees’ sales of securities during the three months preceding the donor’s sales. 
3.Corporate insiders who have to report all of their transactions in company stock typically are able to file a single Form 5 at year-end for charitable gifts instead of a Form 4 at the time of the transfer, thereby making the reporting less onerous. On December 15, 2021, the SEC proposed amendments (available here) to 10b5-1 and disclosure for Executive Officer Equity Grants and Gifts. Historically, Section 16 insiders have been permitted to report gifts of securities on a delayed basis on a Form 5 due within 45 days following the issuer’s year-end. Motivated by concerns that the delays in reporting gifts under Section 16 create the potential for abuse regarding the timing and valuation of such gifts, the SEC has proposed that any gift by a Section 16 insider must be reported on Form 4 within two business days of the gift.

 

IMPORTANT INFORMATION

Investment trends may not materialize. Sustainable Investing and investment return are not always aligned, and may lose value.

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