Robo-advisors fill a need. They are serving people with a small amount of money who haven't traditionally been served by advisors. They have also pushed the entire financial industry forward in terms of becoming more technologically efficient and transparent. That being said, PWR is not a robo-advisor and we have no plans to become one.Read More
Blogs Written by PWR Advisors
We're getting married soon and are wondering if there are any particular financial steps we should take once we're "official?"
-Ned and Nancy the Newlyweds
Congrats Ned and Nancy! Getting married is an exciting and hectic time. Here are the financial steps you should be taking once you are "official."
Start by discussing your financial goals now and in the future. Do you want to buy a home, start planning for a baby, or create an emergency fund? Write down your joint and individual goals and when you would like to achieve them. Make sure to decide which goals will be jointly or individually funded.
Review your credit scores together (free from most credit cards) and pull your full reports at annualcreditreport.com. If one of your goals requires you to apply for a loan, it is good to know in advance if either of you needs to work on increasing your credit score.
Decide if you will combine or not combine your money. There are many things to consolidate like; checking and savings accounts, credit cards, and investment accounts (ex. brokerage or trust accounts). Start by creating a simple balance sheet, one page showing all assets and liabilities you own. This is a great way to see what each of you has and to review how your situation looks as a whole.
Managing the household bills usually falls on one individual. Regardless, it is essential to make sure someone takes on the specific responsibility of paying joint bills on time. Creating a joint cash flow, showing all income coming in and expenses going out, will help both spouses to visualize how much each of you spends and saves. You will also want to decide what types of expenses you will discuss together before purchasing. Couples often set a dollar limit, like $500, for a large purchase that should be discussed.
Also to be considered is whether you will have a joint investment strategy and joint savings strategy or if you are going to save and invest for your own separate goals. Do you both have the same risk tolerance when it comes to stocks? Review your current investment accounts, the holdings (funds invested in), and overall asset allocation (% stock and bonds) to see if you are currently invested similarly.
Review your taxes currently and decide how best to manage them after marriage. You may need to change your tax withholdings to "married status" on your W4 at work. Also, determine whether you will file your taxes Married Filing Jointly or Married Filing Separate. You will also need to agree on if you want to prepare your taxes on your own or find a tax preparer.
Once married, your spouse most often becomes dependent on a second income to support the lifestyle you build together. Do you know how much life insurance you currently have? Discuss and decide if it is enough. Also, look into who has a better health care plan at work. Most often you can combine your health coverage into one family plan. You may also want to consolidate your Auto, Home/Renters, Umbrella and Earthquake Insurance under one carrier to save with bundled prices. Make sure each spouse is named on all policies as a covered individual. It is also wise to consider insuring your engagement/wedding rings on a separate rider. Your home or renters insurance may have provisions for covering jewelry, but if you have expensive rings, it can be a good idea to get more coverage in case they are lost or stolen.
Most often Newlyweds don't have estate plans already created. So now is a good time to get them done, especially if you own a house or have kids. Discuss who you want to have your belongings and money if something were to happen to one or both of you. Remember that assets acquired before marriage are separate property, but if commingled with joint funds, it becomes marital property (each state's laws are different, this is related to CA). You will also want to change the beneficiaries of all your retirement accounts and life insurance to your spouse. Lastly, update the titling of your non-retirement assets to both of your names "Joint with Rights of Survivorship" or in the name of your Trust, if created. An estate planning attorney can help you decide the best titling for your assets as well as create your estate plan. Always review these issues with a licensed estate planning attorney, in your state, before taking action.
Once you become "Official," you are now a joint financial team. Set up regularly-scheduled meetings to review your finances and any financial issues you may be having. Commit to communicating actively and openly about any money issues. If you ever get stuck or are too overwhelmed, always get help from a fee-only and fiduciary CERTIFIED FINANCIAL PLANNER™ for any tasks that seem beyond your grasp.
Planning Within Reach serves Newlyweds and helps their clients with financial planning and tax preparation. If you are interested in how we help our clients, see our Newlywed Plan Packageand our Tax Preparation Service.
Dear Linda,Should I save to my pre-tax 401k at work or my Roth IRA? I cannot fully fund both.
Dear Super Saver,
To determine which account you should save to, calculate your tax rate today versus your projected rate in retirement. In general, Roth contributions are made with after-tax dollars and distributed tax-free. The 401k is the opposite - contributions are made with pre-tax dollars and distributions are taxed at ordinary income rates.
If you are in a higher tax bracket now than you will be in retirement, save to the pre-tax 401k. If you will be in a higher tax bracket in retirement, save to the Roth IRA.
There are other considerations:
Tax laws can change - We don't know for sure what tax rates will be in the future, therefore, some people prefer to save to both types of accounts to hedge this uncertainty and manage their tax bill in retirement.
Employer matching - If your employer offers a match on contributions, save at least enough to the 401k to receive that "free money".
Investment options - If your 401k options are limited and expensive, you may choose to invest in the Roth IRA for the ability to create a custom strategy.
Income phaseouts - You may make too much money to contribute to a Roth IRA. You can typically get around this with a backdoor Roth IRA, but saving to a 401k may still be the best option for high earners.
Flexibility - Roth IRA's and 401k's have different hardship provisions for accessing money earlier than generally allowed (age 59 1/2 with exceptions). Examples relate to education expenses, medical bills and a first time home purchase. Additionally, some 401k's allow you to take out a loan. While this isn't necessarily a good idea, it is an option that is not available to you with the Roth IRA.
Even though one savings vehicle may end up being a better choice for you mathematically, realistically, either is fine as long as you are saving enough. Have a fee-only, fiduciary Advisor develop a custom retirement planto make sure you are on track.
A Ponzi scheme is a fraudulent investment. The organizers of the scheme do not invest your money in something with intrinsic value. Instead, they pay you a "return" with the contributions of new investors. Ponzi schemes received their name in the 1920's after Charles Ponzi was convicted of running this type of business. Despite all the knowledge we have of previous Ponzi schemes, they continue to defraud people from all walks of life. We are even seeing a new wave of Ponzi schemes involving virtual currencies, such as Bitcoin. Here is a summary of what to look for to protect yourself against Ponzi schemes:
High returns with little or no risk.
All investments, especially those expecting higher returns, involve risk. Be suspicious if someone is selling you an investment that allegedly defies the odds.
Unusually consistent returns.
Investment values go up and down on a daily basis. If your investment generates regular, positive returns, regardless of the overall market, that is a red flag.
Most, but not all, Ponzi schemes involve unlicensed individuals or unregistered firms. Research your Broker or Investment Advisor to confirm they are registered with the SEC or required state regulators.
Ponzi schemes typically involve investments that have not been registered with regulating authorities. By not registering, they can avoid disclosing details about the company's management, products, services, and finances.
"Black box" strategies.
Don't invest in something you don't understand. It is not a good sign if your Advisor grows irritated with your questions or treats you as if you don't understand something that is obvious.
Lack of detailed or complete paperwork.
You should be able to read about an investment in writing. Confirm the paperwork is detailed and complete without spelling and grammatical errors.
Difficulty receiving your money.
As the pool of investors grows, it becomes increasingly difficult to recruit enough new investors and contributions to keep the scheme running. Therefore, the organizers may encourage you to re-invest your return versus withdrawing it. They may also become more aggressive with their sales tactics and encourage you to tell your friends and family about the investment. If you were told the investment was liquid, but you are unable to retrieve your money in a timely matter, or without significant penalties, that is cause for concern.
Unfortunately, if you are caught up in a Ponzi scheme, there is no guarantee that you will get your money back or that the perpetrators will be prosecuted. There are many reasons for this, one being that the statute of limitations on financial crimes is five years. PWR is fighting to get this extended, but the reality is that many people don't realize they have been defrauded until year two or three, leaving insufficient time to complete the necessary legal proceedings. Therefore, the best way to protect yourself is to avoid a Ponzi scheme altogether.
Dear Linda, I remember being told that I shouldn't keep more than $250,000 at one bank since that is the FDIC insurance limit. What about my money at a brokerage institution, such as Schwab, Vanguard, or Fidelity? Should I spread my money out across brokerage firms as well?
Dear Curious Carl,
Protecting your money in the bank versus your money in a brokerage firm requires two separate approaches. Let me explain the process for both.
How to protect your money in the bank: This includes your checking, savings, money market deposit accounts (MMDAs) and certificates of deposits (CDs).
1) Confirm these accounts are being held at an FDIC-insured bank.
The Federal Deposit Insurance Corporation (FDIC) is an independent US Government agency that protects your deposit accounts if the insured bank fails. Your coverage is automatic as long as your bank is insured by the FDIC.
2) Confirm you are within the coverage limits.
Each "category" of account is covered for the principal plus interest up to $250,000, per bank. For example, if you have an Individual account and a Trust account, they will each be covered for up to $250,000. View the list of categories here or use the FDIC's tool, EDIE. EDIE allows you to enter your bank's name, account categories, and balances to identify any gaps you have in coverage.
There were 8 banks that failed in 2017. If it happens to your bank, the FDIC typically pays out the insurance within a few days of the bank closing. You will either be reimbursed with a check or your funds will be moved to a new account at another FDIC-insured bank. As the bank gets liquidated, there may be additional available assets that can be distributed pro-rata to those with accounts in excess of the FDIC insurance limits. These payments, though, are not guaranteed and can take several years to be fully distributed.
How to protect your money in a brokerage firm: This includes cash and securities, such as stocks, bonds, Treasury securities, certificates of deposit, mutual funds, and money market mutual funds.
1) Confirm this money is being held at a registered brokerage firm that is regulated by the SEC and under the supervision of FINRA.
Registered brokerage firms are required to keep customer assets segregated from the firms' assets. Therefore, even if the brokerage firm fails, customers' assets are safe. Periodic examinations are conducted to ensure the registered firms are financially sound and that their annual filings are accurate. They are also required to maintain a minimum level of reserves and be a member of the Securities Investor Protection Corporation, which offers SIPC insurance.
2) Confirm you are within the coverage limits.
SIPC insurance is invoked if a brokerage firm shuts down and assets are missing due to theft, fraud or unauthorized trading. Notably, this is not protection against market loss, being sold worthless securities, or bad advice from a broker. Also, SIPC insurance, just like FDIC insurance, does not come into play unless the brokerage firm is already shutting down and in liquidation mode.
SIPC protection is further limited to $500,000, which includes $250,000 in cash, per account "capacity", per firm. Examples of separate account capacities include an individual account, joint account, IRA, and Roth IRA. A comprehensive list of all capacities can be found here.
Because brokerage firms are required to keep customer assets separate, you do not need to spread out your money across multiple brokerage firms as you do with banks. If your brokerage firm fails, your accounts would remain intact and be transferred to another SIPC-insured firm.
Other steps to protect your money:
There is a much greater likelihood that you will encounter other types of fraud with your money. For example, we had a client with an old savings account at a bank. She decided to close the account and consolidate it with her other assets in an effort to simplify her financial life. Upon arriving at the bank, she learned that someone else closed the account fraudulently and took the money. Our client was referred to the bank's fraud department, which originally denied her claim. They stated that she did not check her account frequently enough and should have noticed the missing money. While they eventually approved her claim and restored her account, it was a very stressful event for the client.
To protect yourself against this and other types of fraud, review your bank and brokerage firm's fraud policy or pledge. For example, here is Vanguard's policy, which includes things such as reviewing your accounts on a regular basis and protecting your computer. For additional tips, check out PWR's 3 Steps to Keeping your Accounts Safe.
Sources: https://www.fdic.gov/deposit/deposits/faq.html https://www.sipc.org/for-investors/what-sipc-protects https://www.sipc.org/for-investors/investor-faqs/ http://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors
"Ask Linda" is a monthly personal finance column where the founder of Planning Within Reach, LLC, Linda Rogers, picks one question from her readers and publishes a detailed answer with the hope that it may benefit others. If you would like to ask Linda a question, email linda@planningwithinreach. Due to the volume of questions received, she may not be able to answer every question in a timely manner. For advice on your personal situation, schedule an initial call to learn about our services.
Impact investing offers similar, if not better, returns than traditional investing with the added benefit of creating positive social and environmental change. That being said, creating an impact investment strategy does not have to be a major shift from what you are already doing. We recommend a top-down, holistic approach to impact investing versus divesting from companies or industries in an ad hoc manner, which can lead to underperformance. At a minimum, it can mean the inclusion of environmental, social and governance (ESG) ratings in the portfolio construction process. ESG ratings offer an additional layer of due diligence which has shown to increase returns, reduce risk, and encourage companies to be more transparent with important metrics that haven't traditionally been tracked. For example, we can now analyze how vulnerable companies - and therefore, portfolios - are to changes in regulation, commodity price fluctuations, or fraud in a consistent, systematic way. As of the end of 2017, two-thirds of asset managers were in the midst of integrating ESG criteria into the portfolio management process.
ESG ratings and rating changes (known as ESG momentum) are proving to be invaluable during the portfolio construction process. Here are two examples of controversies that were proactively flagged by ESG rating agencies:
- Equifax’s data breach in 2017 - One year prior, the company’s ESG ratings were the lowest rating possible due to their poor data security and privacy measures.
- Volkswagen’s defeat device scandal in 2015 – Two years prior, the company’s ESG ratings were downgraded due to poor levels of director independence.
Investors can obtain free ESG rating information. To demonstrate an example, let's use "SPY", which is an exchange-traded fund (ETF) that seeks to correspond to the yield and price performance of the S&P 500 Index.
- Go to Morningstar.com and type "SPY" into the search field. Scroll down to the middle-right part of the page to see the Sustainability Rating, Score and Percent Rank in Category. The data is updated on a monthly basis from Sustainalytics. Read more about Morningstar's Sustainability Rating methodology here.
- Many investment advisors have access to MSCI's ESG ratings on paid platforms, but others can view the ratings free for ETFs. For example, go to ETF.com and type "SPY" where it says "Search ETF.com". Click on the first link generated for the "Free Real-Time Quote." Scroll down to see the "SPY MSCI ESG Analytics Insight" which includes the ESG Fund Quality Score and Percent Rank in Category. Read more about MSCI's ESG Rating methodology here.
There are low-cost, passive, index funds that apply an ESG screen. Here are a few examples:
- Fidelity's US and International Sustainability Index fund. The net expense ratio is .30% or lower
- Vanguard's FTSE Social Index Fund has an expense ratio of .20%.
- Schwab's socially conscious fund list which includes mutual funds, ETFs and indexes
- MSCI has a variety of broad and focused ESG index funds.
Recognize that there is more to impact investing than just ESG ratings - but the ratings are a good place to start.
- There are a variety of ESG rating providers and each has their own unique methodology. Therefore, ESG ratings may differ for the same stock on different platforms, depending on the source.
- Likewise, Fidelity's definition of a "sustainability index" is likely to differ from Vanguard's definition of a "social index fund." You need to dig deeper to understand how their methodology and composition varies.
- There are other, non-ESG rated vehicles that can meet your financial goals while also having a positive social and environmental impact. For example, there are cash and fixed income alternatives that will invest your money in underserved communities or micro-finance institutions domestically and abroad. There are real estate investment trusts (REITs) that focus on net zero energy buildings, affordable housing, and transitioning conventional farms to organic practices.
At a minimum, use ESG ratings as an additional tool when creating your investment strategy. It makes good financial sense to put your money with companies willing to be transparent and to make investments now - whether it is with time, capital or resources - to ensure they are well positioned for the long-term.
Work with an advisor educated on impact investing to help you create a custom strategy that meets your needs. For more information on impact investing, check out our related posts, such as Impact Investing: The Lingo and Impact Investing: The Myths.
The companies and investments listed are for illustrative purposes only and are not recommendations by Planning Within Reach, LLC. Conduct thorough due diligence before making any investment decisions and remember that past performance is not indicative of future results. No investment is without risk, including the loss of principal.
Impact investing opportunities continue to grow with one of every five dollars being invested sustainably as of 2016. Regardless, there are myths about impact investing that continue to persist, despite evidence to the contrary. For our second post in a series on impact investing, we debunk these common myths. Myth: My investment return will suffer if I implement an impact investing strategy.
Deutsche Asset Management and the University of Hamburg aggregated the findings of over 2,000 studies in 2016. Around 90% of the studies concluded there is either a neutral or positive correlation between a company's ESG ratings and financial performance. Morningstar Research completed a separate evaluation and came to the same conclusion - there is no performance penalty associated with impact investing.
Myth: Impact investing is for rich people.
There are impact investments that only accept accredited investors, individuals who consistently make over $200,000 per year or have a net worth of over $1M (excluding their residence). However, if you don't qualify as an accredited investor, you still have plenty of options. Examples include:
- Mutual funds and ETF's that are ESG-focused
- Green bonds which finance projects that have positive environmental benefits
- CD's that help fund projects in your local community, such as affordable housing
Myth: An impact investing strategy simply excludes "sin" stocks or industries such as tobacco, guns, alcohol, and gambling.
Divesting from controversial stocks or industries, also known as negative or exclusionary screening, may be part of an impact investing strategy. But it is not the only tool, nor is it the most effective. When constructing a portfolio, investors should take a holistic approach that starts with documenting their values and financial goals. Next, they can identify appropriate strategies, which may include evaluating ESG ratings, divestment and engagement. Finally, investors should analyze how implementing the chosen strategy affects the risk and return characteristics of the investment portfolio. Research shows that divesting from controversial stocks or industries in an ad hoc manner can lead to portfolio underperformance and is therefore not recommended.
Myth: Social or environmental change should be the responsibility of governments and philanthropists, not of investors.
The Sustainable Development Goals (SDG's) developed by the United Nations focus on "ending poverty, protecting the planet and ensuring that all people enjoy peace and prosperity". These goals cannot be met by governments and philanthropists alone. Impact investors are filling the gap by providing capital and resources. They are also developing innovative ways to work with governments and philanthropists to advance change, such as pay for success programs. These programs accept private investors' money to expand social programs that have already proven to be effective. After an evaluation period, if the program reaches the pre-determined goals of benefiting society and generating value for the government, the government remits payment (principal and return) to the investors. If the program doesn't meet its goals, the government pays nothing.
Myth: Creating an impact investment strategy is too difficult.
While creating any investment strategy requires time and effort, creating an impact investing strategy is only getting easier as the number of available resources and vehicles continues to grow. If you want help, engage a fee-only, fiduciary advisor who is knowledgeable about impact investing and willing to take into account your values versus an advisor who insists on doing "business as usual".
Dear Linda,I will be receiving an unexpected bonus shortly. I want to make sure I am smart with the money and have a plan in place for what I am going to do with it. Any ideas?
Sincerely, Lucky Lady
Dear Lucky Lady,
Your question is a common one we receive around this time of year as companies complete their prior-year reporting and issue bonuses. You are wise to create a strategy before spending the bonus. Without knowing the details of your situation, here are some general thoughts to help you get started.
1) Obtain a detailed tax projection from your tax preparer so you know how much of the bonus will be yours to keep after taxes. If your employer withholds less taxes than projected, reserve the balance so you have it available when it is due at tax time. You can also increase your W-4 withholding for the rest of the year. Withhold at least enough to avoid the underpayment tax penalty.
2) Pay off high-interest rate debt including credit cards, personal loans, or student loans. For example, some student loans charge close to a 7% interest rate. If you pay that loan off, it is as if you earned a risk-free rate of return of 7% on the money. However, if you plan to qualify for a student loan forgiveness program, you may not want to rush and pay it off. It will depend on your situation.
3) Build a cash emergency reserve. If you don't have this in place, reserve at least three months' worth of expenses in a high-interest rate savings account. You can reserve a larger amount if you are worried about losing your job, are expecting to move soon, or simply feel more comfortable holding a larger amount of cash. Realize that the interest rate on a savings account will not keep up with inflation over the long-term, so keep this account at the minimum balance required for your personal situation.
4) Increase your retirement savings at work. If your employer offers a retirement plan, you can save up to the IRS limit for 2018. For example, if you have a 401k or TSP, the limit is $18,500 if you are under 50 years old and $24,500 if you are over 50 years old.
Increase savings elsewhere. After you have implemented the first four suggestions, you may consider one or more of the following options:
- Save to a Roth IRA or Traditional IRA, if you qualify.
- Maximize your Health Savings Account (HSA), if you qualify.
- Consider after-tax 401k contributions, if available. After-tax 401k contributions are different than Roth contributions. There is no tax deduction on the savings, but the money will grow tax-deferred and can be rolled into a Roth IRA (without limitation) after you leave the company. Not every company offers this option.
- Save to a Brokerage account. There is no tax deduction on contributions to a brokerage account, but it is still a good option. Qualified retirement accounts (such as a 401k or TSP) are taxed differently than a brokerage account. When you have a mix of account types, you have more flexibility to utilize asset location strategies and manage your tax bill in retirement.
- Save to a donor-advised fund (DAF). A DAF is an investment account for charitable purposes. You invest as you would with any investment account and when you are ready to donate to a qualified charity, use the money from the DAF. Assuming you are eligible for charitable deductions, you will receive the deduction when you place money into the DAF, not when money is withdrawn. If you are charitably inclined and expect to be in a higher tax bracket now than in the future, take advantage of the tax deduction now while it provides a greater benefit to you.
- Save $10K to an I-Bond. I-Bonds are government bonds adjusted for inflation. You are allowed to buy $10K each calendar year per person.
- Fund other goals you may have. Confirm you have enough life and disability insurance, and if not, use the bonus to become adequately insured. If you are saving for a house, earmark some of the bonus for the down payment. If you are saving for a child's college education, consider a 529 plan.
Work with a fee-only, fiduciary advisor and tax preparer if you want a customized strategy that prioritizes your available options in detail.
Impact Investing is an investment strategy that seeks to create a positive social and / or environmental change while also generating a financial return. People interested in impact investing have expressed to us confusion over the many acronyms and terms used. This is our first post in a series on impact investing where we focus on demystifying the most common lingo.
ESG stands for Environmental, Social and corporate Governance. The ESG factors were developed as a way to categorize areas of impact that can be measured and compared across companies and industries. The image below shows the categories that are covered in Environmental, Social and Corporate Governance. For example, you can invest in an exchange-traded fund (ETF) dedicated to Low Carbon stocks (CRBN) or Gender Diverse stocks (SHE) to name a few. In addition to investing for positive change, there are those that believe companies leading in ESG practices are more likely to have better long-term results. Arabesque, an investment firm, dropped Volkswagen from its portfolio before the emission scandal was disclosed because VW scored poorly on the Corporate Governance factor.
SDG's are the United Nations Sustainable Development Goals. In 2016, the UN published a set of broad, global goals that are meant to be a guideline for governments, philanthropists, non-profits and others working towards positive change, such as impact investors. Some of the SDG's overlap with ESG factors, but SDG's are more broad-based goals.
SRI stands for Socially Responsible Investing. SRI seeks to integrate non-financial factors into creating a portfolio, like impact investing, but the emphasis is on excluding stocks the investor considers to be unethical from their portfolio (divestment) versus investing proactively for positive change (impact investing). An example of an SRI strategy is to exclude investments in companies that produce or promote addictive substances or behaviors (such as alcohol, gambling and tobacco) from a fund.
Impact investing and SRI are often times used interchangeably. At the 2017 SRI Conference in San Diego, one of the speakers and veterans in the industry addressed this confusion with the audience and called for practitioners to stand behind one term, choosing Impact Investing as the preferred choice. The SRI conference is still called the SRI Conference, not the Impact Investing Conference, but it is an example of how the industry is evolving and working towards creating more clarity and transparency with the terminology.
Over the next few months, we will address impact investing myths, strategies and how to get started if you want to integrate an impact investing lens into your portfolio strategy. Don't forget to ask us a question regarding this or any other topic.
Dear Linda, I am a widow and want to gift some of the individual, concentrated stock in my brokerage account to my only child, my adult son. I am tired of managing the stock and feeling like I need to stay on top of the earnings reports, news, etc. I would rather gift it to him and have the rest of my portfolio in low-cost, diversified positions. The stock has a very low basis and will incur a large amount of long-term capital gains upon selling. What are your thoughts? Sincerely, Generous Mom
Dear Generous Mom,
Here are a couple options:
Option 1 - Gift the asset: If your son were to receive the stock as a gift, he would also receive your cost basis (purchase price plus other costs like commissions and fees). Therefore, when he goes to sell it, he will also owe a large amount of capital gains. This would meet your objective of getting rid of the concentrated position, which you presumably don't need to fund your spending needs, but it may not be the most tax-efficient strategy.
Option 2 - Bequeath the asset: If your son were to inherit the stock upon your passing, he would receive a step-up in basis. That means the cost basis of the asset would equal the fair market value at the date of your death. In other words, if he waits and inherits the stock, he can turn around and sell it upon your passing with minimal, if any, taxes due and invest the proceeds in a diversified portfolio.
Conduct a thorough analysis of option 1 & 2 with your financial and tax advisor to confirm which strategy makes the most sense given you and your son's ages, health situation, tax rates, the stock value and the unrealized gain. You should also include an estate planning attorney in the discussion to see if there are any estate or gift tax issues. For example, there is an annual, per recipient gifting limit ($15K for individuals in 2018) and an estate tax exemption ($11.2M for individuals in 2018).
If you decide Option 2 is the best choice, speak with your financial planner about other ways to help reduce your concentration in the stock. Here are some examples:
1) Stop re-investing interest and dividends so you do not further the concentration issue.
2) Consider donating some of the highly appreciated stock instead of cash. The potential charitable deduction would be equal to the fair market value of the stock and an IRS qualified charity can sell the asset without having to pay tax on the gain.
3) Harvest losses elsewhere in your portfolio to offset the capital gains realized when selling some of the highly appreciated stock.
Have a question that relates to financial or tax planning? Ask Linda.