Founders and executives holding large concentrated stock positions have several strategies available to reduce risk and improve diversification while managing the timing and magnitude of capital gains taxes.

Why It Matters

A concentrated stock position — defined as a single security representing a disproportionately large share of an investor's total net worth, often 20% or more — is one of the most common and consequential wealth challenges facing founders, executives, and early employees. While the position may represent years of effort and genuine conviction in a company's value, the concentration itself introduces a level of risk that a broadly diversified portfolio would not carry.

The difficulty is that the very appreciation that created the concentration also creates a tax consequence upon sale. Capital gains tax — a federal levy on the profit realized when an appreciated asset is sold — can range from 15% to 23.8% at the federal level for long-term holdings, and state income taxes may apply as well. For founders who have relocated from high-tax states like New York, California or Illinois to Tennessee or Florida, the state tax picture may be more favorable, but the federal exposure remains meaningful and requires careful planning.

What to Know

Several techniques exist for addressing concentrated positions, each with distinct trade-offs in terms of tax efficiency, liquidity, complexity, and estate planning implications. No single approach is universally appropriate; the right path depends on the individual's income, estate size, philanthropic interests, holding period, and tolerance for ongoing exposure to the underlying company.

Among the most commonly considered strategies are exchange funds, charitable remainder trusts, donor-advised funds, systematic gifting programs, and staged liquidation over multiple tax years. An exchange fund is a private investment vehicle that allows an investor to contribute appreciated shares in exchange for a diversified interest, potentially deferring capital gains if structured properly and held for the required period. A charitable remainder trust (CRT) is an irrevocable trust that sells appreciated assets tax-free, pays income to the donor for a defined period, and transfers the remainder to a designated charity — offering both income and philanthropic benefit. A donor-advised fund (DAF) allows a donor to contribute appreciated shares, receive an immediate charitable deduction, and recommend grants to qualified charities over time without triggering capital gains at the point of contribution.

Key Considerations

The sequencing and structure of any diversification strategy matters as much as the technique itself. A staged liquidation — selling a defined percentage of a position over several tax years — can spread the capital gains liability across multiple filing periods and potentially keep income within lower tax brackets. This approach requires discipline and a clear plan, as market conditions, company-specific events, and personal liquidity needs can disrupt an otherwise orderly process.

Hedging strategies, such as protective puts or collars, are also used by some investors to limit downside exposure on a concentrated position without triggering an immediate sale. A protective put is an options contract that gives the holder the right to sell shares at a specified price, effectively placing a floor on potential losses. A collar combines a protective put with the sale of a call option, capping both downside and upside. These strategies involve their own costs, complexity, and tax treatment and are generally most suitable when coordinated with a fiduciary (a legal standard requiring the advisor to act in the client's best interest at all times) advisor collaborating with a qualified tax professional.

How Families Typically Approach This

Discerning families and executives generally begin by assembling a coordinated team of advisors — a fiduciary investment advisor, a CPA, and an estate planning attorney — before taking any action. The investment advisor maps the full picture of the position: cost basis, holding period, existing portfolio context, and future liquidity events. The CPA models the tax exposure under various scenarios. The estate attorney evaluates whether trust structures, gifting programs, or charitable vehicles align with the family's longer-term intentions.

Families who have relocated to Tennessee or Florida — states with no personal income tax on wages or investment income — often find that their state tax burden has already been meaningfully reduced. Even so, federal capital gains exposure remains substantial for large positions, and the planning process is no less rigorous. The goal across all of these approaches is not to eliminate tax entirely — that is rarely achievable — but to exercise considered stewardship over when and how that liability is recognized, in a manner consistent with the family's broader financial and legacy objectives. As described on the firm's services page at skelafinancial.com/our-services, this kind of integrated, bespoke planning is central to how Skela Financial approaches wealth stewardship for business owners and executives.

What is a concentrated stock position and why is it considered risky?

A concentrated stock position refers to a scenario in which a single company's stock makes up a disproportionately large percentage of an investor's total investment portfolio or net worth — commonly defined as 20% or more. The risk is straightforward: if that single company experiences a significant decline in value due to business performance, regulatory action, or broader market conditions, the investor's overall financial position can be materially harmed in a way that a diversified portfolio would not be. Founders and executives are particularly susceptible because their wealth is often tied to the same company where their human capital is also concentrated, compounding the risk.

How does a charitable remainder trust work for diversifying a concentrated position?

A charitable remainder trust, or CRT, is an irrevocable trust arrangement in which an investor contributes appreciated assets — including concentrated stock — to the trust. The trust then sells those assets without incurring immediate capital gains tax at the point of sale. The trust reinvests the proceeds in a diversified manner and pays the donor (or other named beneficiaries) an income stream for a specified term or for life. At the end of the trust's term, the remaining assets pass to one or more designated charities. The donor receives a partial charitable income tax deduction in the year of contribution, the amount of which depends on the trust's structure and IRS valuation rules. CRTs are complex instruments that require careful legal and tax structuring.

What is an exchange fund and who is it typically suited for?

An exchange fund is a private investment partnership that allows multiple investors, each holding a different concentrated stock position, to pool their shares together. In exchange for contributing their concentrated shares, each participant receives a pro-rata interest in the diversified pool — potentially deferring capital gains taxes rather than recognizing them at the time of contribution. By IRS rules, participants must generally hold their interest in the fund for at least seven years for the tax deferral to be respected. Exchange funds are typically available only to accredited investors — individuals meeting specific income or net worth thresholds defined by securities regulations — and are structured as private vehicles with minimum contribution requirements that vary by fund.

Is it better to gift stock to family members or sell and gift the cash?

Gifting appreciated stock directly to family members — rather than selling the stock and gifting the after-tax proceeds — can be a more tax-efficient strategy in certain circumstances. When stock is gifted, the cost basis transfers with it to the recipient, meaning the capital gains are not triggered at the time of the gift. If the recipient is in a lower income tax bracket, they may pay a reduced capital gains rate upon an eventual sale. However, the IRS annual gift tax exclusion — the amount one person can gift to another per year without filing a gift tax return — sets a ceiling on how much can be transferred in this manner without additional reporting or potential gift tax implications. Families considering this strategy should work with an estate planning attorney and tax advisor to model the full implications.

How does relocating from New York, California or Illinois to Tennessee or Florida affect the tax planning around a concentrated position?

Tennessee and Florida are both states with no personal state income tax on wages, salaries, or investment income — a meaningful contrast to, for example, New York, which imposes both state and, for New York City residents, local income taxes that can add several percentage points to the effective tax rate on capital gains. For a founder or executive who has established legal domicile in Tennessee or Florida prior to a liquidity event, the state tax component of a capital gains realization may be eliminated entirely. However, domicile establishment involves more than simply purchasing a home — it requires demonstrating the intent to make the new state one's permanent home through a combination of factors including time spent, driver's license, voter registration, and other ties. The timing of a domicile change relative to a planned liquidity event is a nuanced area requiring input from both tax counsel and a fiduciary advisor familiar with multi-state planning.

This article is for educational purposes only and does not constitute investment, tax, or legal advice. Skela Financial, LLC is a registered investment advisor in the states of Tennessee and Florida. Individual circumstances vary and require personalized analysis before any financial decision is made.

Skela Financial is a registered investment advisor based in Tennessee and Florida, providing portfolio management, wealth stewardship, and bespoke financial planning to business owners, families, and individuals nationwide.