If you’ve built up a large position in a single stock – from years of stock awards at your company, a successful IPO, or a major inheritance – you’re not alone. It’s a common situation for high-net-worth investors. But holding too much of one stock can be risky. No matter how well a company is doing today, things can change quickly. The key question becomes: How can I diversify without triggering a major tax bill or giving up all my upside?
Good news: There are several ways to reduce that risk while still maintaining flexibility and control. Here’s a breakdown of some effective and creative strategies designed to help address concentrated stock risk.
Exchange Funds: Diversify Without Selling
Exchange funds allow you spread your investment risk across a broad portfolio – without having to sell your stock and trigger capital gains. You contribute your stock to a special investment fund that accepts concentrated positions from other investors. In return, you receive shares of the fund, which holds a diversified mix of stocks. This lets you spread your investment risk across a broad portfolio—without having to sell your stock and trigger capital gains taxes. Essentially, you’re trading your concentrated position for a slice of a more diversified pie, all while deferring taxes until you eventually redeem your fund shares.
Why Consider It:
- Avoids capital gains taxes at the time of diversification
- Provides instant diversification into a broader equity portfolio without having to sell
- Maintains exposure to the equity market, helping to preserve long-term growth potential
Things To Know:
- There is typically a 7-year lock-up period before you can redeem fund shares
- Only available to accredited investors meeting specific income and net worth thresholds
- Limited to publicly traded stocks; not suitable for private company shares
- Individual stocks cannot comprise more than 30% of the total fund value
- Each exchange fund is different and offers different levels of diversification, and some funds may still have concentrated positions
Strategic Selling Over Time (with Tax Planning)
This approach involves gradually reducing your stock position over a multi-year period instead of all at once. You would work closely with your advisor to time sales based on your income levels, tax brackets, or losses available elsewhere in your portfolio. By pacing sales, you may be able to keep your tax rate lower and/or avoid pushing yourself into a higher bracket and reinvest the proceeds in a diversified way aligning with your goals. It is a flexible strategy that allows you to retain control while mitigating both tax impact and market risk over time.
Why Consider It:
- Offers flexibility in timing, amount, and tax-efficiency of each sale
- Helps minimize the capital gains burden by spreading gains across multiple tax years
- Creates opportunities to harvest losses or make use of charitable deductions
Things To Know:
- You continue to bear market risk on the unsold position until fully divested
- Requires disciplined execution and a clear long-term investment plan
- Strategy will take time to execute and does not offer immediate diversification
- May be enhanced when combined with charitable giving or loss-harvesting strategies
Charitable Remainder Trusts: Give With Benefits
A Charitable Remainder Unitrust (CRUT) allows you to donate appreciated stock to a trust that can sell the shares without triggering capital gains tax. In return, you (or someone you choose) receive annual income based on a fixed percentage of the trust’s value, which is recalculated each year. The CRUT can be traded without any tax consequences, but the distributions taken are taxable (similar to how IRAs work). At the end of the trust term (typically when you pass away) the remaining assets go to a charitable organization of your choice. This strategy helps you reduce risk, support causes you care about, and create a steady income stream for yourself or your family.
Why Consider It:
- Defers or eliminates capital gains taxes on donated stock
- Generates annual income that adjusts with the market, offering growth potential over time
- Allows for ongoing charitable giving and legacy planning
- Accepts additional contributions after the initial setup
Things To Know:
- Annual income is variable, based on the trust’s annual value (typically 5%–7% payout)
- Irrevocable – once the trust is funded, the assets are permanently designated for charity
- Requires careful planning, legal drafting, and ongoing administration
- Ideal for charitably inclined investors who want flexibility and long-term impact
351 ETF Conversion: A Tax-Smart Way to Diversify Without Selling
A Section 351 ETF conversion is a tax-deferred strategy that allows you to exchange a concentrated stock position for a diversified ETF through a carefully structured transaction. In this approach, you contribute your appreciated stock to a newly formed C-corporation, which then transfers the stock in exchange for ETF shares. You, as the shareholder, receive ownership in the diversified ETF without recognizing capital gains at the time of the transfer. Over time, the structure can be used to gradually diversify or distribute shares in a tax-efficient manner, while also creating opportunities for estate planning, charitable giving, or long-term wealth transfer.
Why Consider It:
- Allows you to diversify a concentrated stock positions without immediately triggering capital gains taxes
- Provides access to a diversified, low-cost ETF that can align with your long-term investment goals
- Helps reduce portfolio risk while keeping you invested in the broader market, and can divest shares over time
Things To Know:
- Cannot add additional shares to the fund once it has launched
- Must contribute diversified holdings – one single position cannot make up more than 25% of the total contribution and the five largest positions cannot make up more than 50% of the total contribution
- Given the complexity and regulatory requirements under Section 351, it is important to engage with an experienced investment manager who has expertise in executing these types of transactions
- Still a relatively new strategy, so there are not many options available
- Best suited for ultra-high-net-worth investors with large, highly appreciated positions in public companies
Gifting to Family or Utilizing a Donor-Advised Fund
By gifting appreciated stock directly to others (such as family members in lower tax brackets) or to a Donor-Advised Fund (DAF), you can reduce your taxable estate and potentially avoid capital gains taxes altogether. DAFs function like a charitable investment account: you donate the stock, receive an immediate tax deduction, and can then recommend grants to charities over time. Gifting strategies are simple yet powerful tools to align your wealth with your legacy goals, especially when coordinated as part of a broader estate or philanthropic plan.
Why Consider It:
- Allows you to support family or charitable causes while reducing your taxable estate
- Donating appreciated stock avoids capital gains tax and provides a current-year deduction
- DAFs offer flexibility in timing – fund now, grant later
Things To Know:
- Annual gift tax exclusions apply for family gifts ($18,000 per recipient in 2024)
- DAFs are irrevocable – once donated, funds must be used for charitable purposes and have strict compliance requirements with IRS rules
- Gifts to minors or large gifts may require legal structures such as trusts or custodial accounts
- DAFs do not provide income to the donor, they are suitable for philanthropic intent, not personal cash flow
Cashless Collar: Reduce Risk While Retaining Ownership
A cashless collar is an options-based strategy designed to protect a concentrated stock position from downside risk without triggering immediate taxes. It works by simultaneously purchasing a put option (which gives you the right to sell the stock at a predetermined price) and selling a call option (which obligates you to sell the stock if it rises above a certain price). The premium received from selling the call typically offsets the cost of the put, making the overall strategy cost-neutral or “cashless”. This creates a price band in which your stock can fluctuate – you’re protected from significant losses below the put price, but your gains are capped above the call price. This strategy can serve as a temporary bridge, providing protection and keeping your shares intact.
Why Consider It:
- Helps protect your downside risk without selling shares or incurring capital gains taxes
- Provides a cost-effective hedge – typically no out-of-pocket cost due to offsetting premiums
- Offers a flexible, temporary solution that can be tailored to specific price targets and timeframes
- Allows you to stay invested in your stock while managing near-term volatility
Things To Know:
- Caps your upside potential – any gains above the call price are forfeited
- Typically structured for 1-3 years but can be renewed or adjusted as needed
- Involves the use of options contracts, which require close monitoring and professional oversight
- You typically need to close out the options before they expire to avoid triggering a sale. However, the strategy allows you to retain your shares with limited downside risk and defined upside
- Works best as part of a broader diversification or liquidity plan, often in coordination with tax and estate strategies
Of course, there can be nuances and exceptions to each of the above options, so it is important to find the best fit for your specific financial situation, goals, and risk tolerance. What works well for one investor might not be ideal for another, especially when taxes, estate planning, and charitable intentions come into play. Whether you are looking to unlock liquidity, reduce risk, support your legacy, or simply gain peace of mind, a thoughtful, well-structured strategy can make a world of difference.
Aldrich Wealth advisors regularly assist clients in evaluating a range of strategies to manage the complexities of concentrated stock positions and the importance of aligning your investment strategy with your broader financial plan. If you’d like to explore your options for managing concentration risk while staying tax-aware and opportunity-focused, we’re here to help. Reach out to your Aldrich Wealth advisor today to start the conversation.
Disclosure: The strategies described herein are for informational purposes only and are not intended as investment, tax, or legal advice. There is no guarantee that any strategy will achieve its intended outcomes. All investments carry risk, including the risk of loss. Aldrich Wealth LP is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. Please consult with your tax or legal advisor before implementing any strategy discussed.
