Meredith Schneider, CFP®
Can Tech Company Employees Diversify a Concentrated Stock Position in a Tax Efficient Manner?
Updated: Jun 25, 2019
Strategies to Consider with Employee Stock Options or RSU’s for Google, Facebook, Apple, Uber, Lyft, Pinterest and Other Tech Company Employees
Schneider Wealth Management Clients are often Silicon Valley employees at tech companies like Google, Facebook, or Apple along with employees at the expected IPO companies like Uber, Pinterest, or Airbnb often earn a great deal of their compensation through restricted stock or stock options in their companies. This can result in a large percentage of their net worth in equity of their employer. Frequently employees like executives, engineers, and attorneys wonder if there is a way they can diversify their net worth without incurring a large tax bill.
The short answer is that there are ways to sell while potentially reducing a tax obligation, but like with most things tax related there is usually a catch and no easy answers. Many strategies come with an assumption that the stock in the company will do well and grow, but there are many cases where that does not happen both in the short run or long run depending upon the company, and this outcome affects the effectiveness of such strategies. There are several strategies to diversify or hedge a concentrated position, but this writing will concern only the ones that deal with selling or reducing ownership of stock.
1. Exercising and Holding Stock Options and then Selling after Holding Period - For most employees at post-IPO companies, this strategy is less available due to most stock compensation for public companies coming from RSU’s rather than stock options. For employees at companies with expected IPO coming this year, this strategy is likely less powerful today than for those who exercised and held over a year ago, but still could be considered.
2. Exchange Fund - A private placement of stock into a limited partnership for typically 7 years.
Pro - Potential to diversify holding without selling stock, thus not incurring a tax liability due to a traditional sale.
Con - Lack of access to funds, since have to keep investment for many years. May not like shares of other companies received at the end of the fund and thus end up selling those shares when received. Increased tax filing complexity due to K-1’s. Costs.
3. Charitable Remainder Trust - This is best suited for those who are already charitably inclined and are looking for income. Donate your stock to the trust, receive a tax deduction, the trust can sell the shares without capital gains, and reinvest the proceeds to provide an income stream to you the donor. When trust is done, charity keeps the assets.
Pro - Income stream and charitable donation
Con - Younger employees typically do not like giving up control of assets with such a potential long life span ahead of them. Fewer assets for a potential heir(s) to receive. Costs.
4. Move to another state - For California residents working at these companies, many employees are in the state's highest tax bracket. Moving to another state like Washington, Nevada, or Texas without state income tax, might reduce the overall tax liability when selling shares.
Pro - Potentially reduced tax bill.
Negative - Very large life implications not available to many people and potentially not desirable from a lifestyle standpoint. Have to be careful to do so in a manner that the state recognizes the change of domicile.
5. Move to another country or live outside the country - This is a very complex strategy and one that likely does not provide a viable option for most employees and potential upside could limit benefits that likely will not outweigh the costs that such a move would require.
6. Strategically Time Selling - Depending upon your tax bracket, the timing of your sale could affect your tax obligation. Selling during a particular year or over a certain number of years could prove beneficial tax wise.
Pro - Potentially reduced tax bill.
Con - If delaying selling stock to attempt to gain a tax benefit, might lose all benefit due to a decline in the value of the stock. If need proceeds, such a delay may not be possible or desirable.
All of these strategies should be discussed with a tax advisor. Employees should be aware of potential black-out windows that prevent selling shares at a certain time. Whether or not diversification makes sense will get addressed in a future writing here at Schneider Wealth Management.
Meredith Schneider, CFP® is a Palo Alto & Redwood Shores, CA fee-only financial planner. Schneider Wealth Management provides financial planning and investment management to help technology executive, engineer, and attorney clients plan for financial independence and spend more time doing what they love to do. Schneider Wealth Management serves clients as a fiduciary and never earns a commission from an investment or insurance recommendation. While the majority of Schneider Wealth Management’s clients live and work on the San Francisco Peninsula, through technology tools such as online conferences, the firm is able to serve clients worldwide.