In the unlikely event they don't get full-ride scholarships
October 30, 2011 6:50 PM   Subscribe

I own a lot of shares in a company that has done very well on the market recently. So well in fact that if I sold it all now, I could divide the proceeds equally between my two kids and set them both up for college — something my parents couldn't do for me. However, my oldest child won't be ready for college for another 12 years. Is there any way to convert the stock shares into something less volatile than the market, without incurring capital gains tax? My kids both have 529 funds and I'd love to be able to move the stock there but I want to avoid the IRS as much as possible. Yes, I am naive and ignorant of the finer workings of finance, so please be gentle.
posted by Ratio to Work & Money (12 answers total) 4 users marked this as a favorite
 
What about selling call options? Covered calls should reduce (but not eliminate) your market exposure, but the tax situation is complicated.
posted by pwnguin at 7:49 PM on October 30, 2011


Obligatory 'do you have a lawyer you can contact' plug here, or at least your friendly neighborhood financial advisor. I think this stuff is right up their alley, and it benefits everyone if Unca Sam can keep his grubbies off your money. I don't know squat about what taxes are incurred by reinvestment, but there's got to be some way around it that doesn't involve shady Bahama banks or whatever.

autoclavicle makes a good point -- if you do transfer this money to a college fund for the kids, make sure you've figured out what happens to it if they don't go/finish/need it.
posted by Heretical at 8:43 PM on October 30, 2011 [1 favorite]


(Husband of alygator here) In principle, no, you can't convert shares into anything else without recognizing the capital gains. It still might be worth doing if you're worried about the future performance of the stock, have offsetting capital losses you could recognize now, or for some other reason. But you would probably need to meet with a financial advisor and/or accountant to evaluate it.
posted by alygator at 8:45 PM on October 30, 2011 [2 favorites]


It's also worth thinking about what taxes you'd pay now versus later. I don't think the capital gains tax will be lower than it is now in my lifetime.

Of course, there is a benefit to deferring taxation too- you'll have more principal to grow from in the next 12 years that way.

Really, though, this is enough money that it's worth contacting a tax expert to work through the consequences with you.
posted by nat at 8:53 PM on October 30, 2011


I don't think a lawyer is called for here. Contact an independent financial planner, who will work with a lawyer to set up the right kind of vehicle if this is indeed what is recommended.

Get a professional to help.
posted by Ironmouth at 9:01 PM on October 30, 2011


I am not a tax advice professional.

If you've held these stocks for long enough they may qualify for long-term capital gains which is probably the lowest tax rate you're likely able to get. Simply selling them and putting the money in a 529 is probably as efficient as it gets - generally transferring stocks in or out of tax-efficient accounts has to take into account any gains you've accrued. Without some fancy footwork you're not very likely to be able to simply move gains into a tax shelter and avoid taxes completely.
posted by GuyZero at 9:12 PM on October 30, 2011


I'm not a financial advisor, and this isn't financial advice, but in any case you should sell the single stock. I don't care if you bought Apple Computer back when Forrest Gump did; the risk-adjusted return on any single stock is much lower than mutual funds, unless of course you're a very lucky investment professional.

Capital gains taxes are quite low right now on a historical basis, so that's another factor in favor of selling the stock regardless. There's no way (that I'm aware of) to avoid paying tax at all, and (again, as I understand it) the amount of tax wouldn't change even if you gifted all of it to the child, which carries its own issues. Make sure your own nest is feathered, consider the issues raised above about using the funds for college, and then make the investment. Dollar-cost averaging (selling equal amounts, in dollars, each month and investing them) would probably be a good idea. If you decide not to open the 529 (which is uniquely tax advantaged), you might consider putting the money into the Vanguard 2025 Target Date Retirement fund. This fund is obviously designed for retirement, but the idea is the same: invest the majority in stocks for future growth, with the balance in bonds for security. The ratio then shifts gradually toward a more conservative allocation as the target date draws nearer. If you feel like something more conservative, one of the best features of the target date funds is the ability to "dial a risk," by choosing a date closer to the present. Or, you could look at "retirement income" funds, which are very, very conservative, but also have very little opportunity for growth.

My family went to a fee-only financial advisor (the only kind you should consider) and he advocated a three-legged-stool approach. Namely, a mix of both tax-deferred (401(k) / traditional IRA), taxed-up-front (Roth IRA), and taxable accounts.
posted by wnissen at 9:16 PM on October 30, 2011


Does your state have a college savings plan?
posted by Blasdelb at 9:38 PM on October 30, 2011


You may wish to look into the various forms of planned giving that may assist with this. I believe you may be able to accomplish a great deal with either a flip trust or, possible, with some form of charitable gift annuity. While avoiding capital gains entirely can't be done with these, both present some tax advantages.

I am not a financial adviser nor am I a tax lawyer. You should, obviously, contact your own financial adviser who will be able to explain to you the appropriate opportunities for your unique situation. (But you might mention the charitable idea. You could help a cause you love, your kids, and avoid paying quite as much to the government, maybe.)
posted by driley at 2:09 AM on October 31, 2011


Whatever you do, get that money out of that single company. My god, you won the lottery basically. Time to cash out before your luck runs out. Diversify or put it in a lousy savings account any way you can. And btw college tuition goes up much faster than inflation or the markets, and 12 years is a long time for the difference in interest rates to compound.
posted by Yowser at 2:27 AM on October 31, 2011 [3 favorites]


You didn't ask this, but once you make your decision to sell, it is probably good for your mental health that you stop monitoring this single stock. It is highly unlikely you will choose the exact optimum moment to sell and that if you check the share price a week later, or a month or year later, you could have done better. (Or worse, even much, much worse.) Remember that the point of money is not the accumulation of wealth but rather the servicing of needs. If the point of the sale for you is to cover your kids' college tuition, the stock has done the job for which you earmarked it.
posted by DarlingBri at 5:26 AM on October 31, 2011 [3 favorites]


IANAFP, but hoo boy, I think you need to rebalance -- and yes, that means taking the gains now to protect them and diversify your appreciation, even if there's a tax consequence (but you don't need to do it all this year, either).

For cautionary tales, I had a friend who worked for Lehman Brothers (but had moved on). He had a good chunk of his retirement in Lehman stock, just because it was on an autopilot ESIP. They tanked. He took a bath.

If you have enough for college now, you have enough money to protect by getting yourself a fee-based financial planner, who can help you find the best way to set this up.
posted by dhartung at 4:29 PM on October 31, 2011


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