The Situation

Yael* was a successful C-suite executive in her late 40s. She worked at a profitable, publicly traded pharmaceutical company where she had been an employee for 16 years. Now in her prime earning years, Yael wanted to maximize her compensation with several goals in mind: Structure her wealth as efficiently as possible. Fund a comfortable retirement for her husband and herself. And provide for their children’s trusts.

Like many corporate executives, the majority of Yael’s portfolio value was made up of shares in the company she worked for. Over the years, Yael had received stock as part her compensation. Now those shares had considerably appreciated, and she was earning a tidy income from the dividends.

But she knew there were a number of risks associated with her concentrated position. A drop in the price of her company’s stock could affect her overall net worth significantly.

The obvious step would be to diversify her portfolio by selling her shares, but this was not an option: Not only was Yael restricted to “open window periods” for selling, but she was also required to keep a portion of her stock in order to meet minimum holding requirements. To complicate matters further, some of Yael’s shares had not yet vested.

Even without these constraints, an immediate sale could result in a significant capital gains tax, given her stock’s appreciation.

Our Approach

Yael spoke to J.P. Morgan Private Bank, who set to work developing a customized investment strategy backed by sophisticated modeling and proprietary research.

Our multi-step approach included:

  • Diversification: To relieve Yael’s overly concentrated position, we suggested a 10b5-1 trading plan, allowing her to trade her company stock without violating any prohibitions on sales. We have a dedicated 105b-1 group with market knowledge, regulatory expertise and more than 35 years of restricted stock experience. Our specialists showed Yael the increased trading flexibility and upside benefits a 10b5-1 plan could deliver. 
  • Wealth Transfer: We suggested that Yael minimize the tax consequences of her holdings by transferring them to family members through a Grantor Retained Annuity Trust (GRAT). These flexible structures allow Yael to transfer some potential future appreciation of assets free of gift tax, while retaining the value of the assets themselves. She was pleased to learn that transferring assets to a GRAT can preserve more wealth for her family than holding the assets would.
  • Deferred Compensation: We urged Yael to take advantage of her company’s deferred compensation plan, which allows executives to put a portion of their compensation in an investment account that grows tax free during the life of the plan. (Assuming equivalent returns, plan assets grow 1.75% more per year than non-plan assets, because taxes do not take a cut of the earnings.) Yael’s compensation exceeded her expenses by a substantial margin, so the plan made great sense to her. She asked us to manage the investment portfolio she would fund through this plan.

*Names and details have been changed to protect our clients’ identities. Information is not a guarantee of future results.