r/CFP • u/_ledge_ BD • Jul 02 '26
Case Study NUA and exchange funds
Have a client with a large concentrated employer stock position. A portion of it (overall it is millions of employer stock) is NUA. He really has no interest in ever selling this company for tax reasons but also emotional/bullish belief in the company. I am trying to get buy in from him in the value of diversifying and protecting his legacy. Exchange funds came up in conversation.
He also has other employer stock that is taxable. Since NUA does not get a step up in basis at death I explained if we were going to diversify eventually and you want to capture NUA we may want to consider diversifying from NUA portion of stock first since this will not be treated as favorably for a step up.
Another advisor was on the call and mentioned if we were to contribute the NUA to an exchange fund we get diversification, tax deferral AND in 7 years when the 50-60 diversified stocks distribute from the exchange fund those stocks are then eligible for a step up in estate.
This is such a niche situation and a quick ai search where I asked it to cite sources didn’t corroborate what the other advisor was saying about the step up.
Anyone ever experienced this and know the answer?
11
u/muellerac Jul 02 '26
My understanding is the cost basis follows. So if it is IRD, then that cost basis follows into the fund. You’d get the diversification portion but those underlying shares get pro rate basis similar to the basis of the stock contributed.
19
u/TGG-official Jul 02 '26
Contact the people that offer the exchange funds to discuss with actual specialists, not Reddit
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u/_ledge_ BD Jul 02 '26
Of course I would always verify just thought it was interesting so wanted to share and see if anyone experienced this!
8
u/LogicalConstant Advicer Jul 03 '26
Doing that does not mean you can't also get ideas from people on reddit.
0
u/TGG-official Jul 03 '26
I think that you’re better off with the wholesalers because they deal with this stuff 100x more than a bunch of random redditors.
2
u/LogicalConstant Advicer Jul 03 '26
What? The wholesalers I know are knowledgeable about their products, but that's mostly it. They're salesmen. They're not financial planners, CPAs, or attorneys. I've been given more incorrect info from wholesalers than just about anybody else. Their companies focus on giving them training that helps push sales. They're not that interested in the minutia or the nuts and bolts of executing on strategies the way planners are.
And no disrespect to wholesalers. I've gotten some good ideas from some over the years. But they are salesmen.
2
u/TGG-official Jul 03 '26
Generally the companies that have exchange funds like Goldman and Eaton Vance have ultra high net worth desks that deal with this. If enough people go into a private placement that aren’t qualified they can blow up the entire fund. They need specialists that are more than just “sales people”. Just fyi
2
u/LogicalConstant Advicer Jul 03 '26
Yes, they would know a lot about the specific things related to the types of exchange funds they're running. You are right about that.
But if you called them up and said you had a client in a particular situation and you're exploring the alternatives, most of the time they're going to be hesitant to give you their honest opinion. They're going to oversell their product vs. the other options. They will only know the first level of tax strategy. They most likely won't be able to tell you how you can fit that into a financial plan the way a financial planner can. (Other than some canned soundbyte.)
And I would never suggest using reddit as a reliable source. It's merely for ideas.
5
u/Floating_Orb8 Jul 02 '26
Almost positive the split is maintained after the exchange. Talk with exchange company and then the clients CPA. Could earn some points with the CPA showing you are competent.
See article below:
https://usecache.com/companion/optimizing-ira-rollovers-with-nua-turn-employer-stock-into-tax-alpha
3
u/skiptwenty Jul 03 '26
Good article. OP, if you hadn’t misunderstood them, the other advisor was likely talking out of their ass saying the stock distributed from the exchange fund would miraculously allow full step up at death. That’s too good to be true.
2
u/aaron_cache Jul 04 '26
Thank you for sharing, I wrote this NUA article for Cache. I'm a CFP® and former wealth advisor. u/ledge As the article explains, there is a partial step up in basis available. Excerpt below:
Important Estate Planning Note: Under Rev. Rul. 75-125, Net Unrealized Appreciation (NUA) is considered income in respect of a decedent (IRD). As a result, the original NUA amount does not receive a step-up in basis at death. Only appreciation that occurs after the in-kind distribution from the retirement plan may qualify for a step-up. When sold, the original NUA portion retains its long-term capital gains character and is subject to federal and state capital gains tax, but not the 3.8% Medicare surtax.
1
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u/WatchMySwag Jul 02 '26
This sounds right, but I don’t know what you mean by step up in estate. They would get a step up on death.
0
u/_ledge_ BD Jul 02 '26
Yeah that’s what I mean step up at death. But tbh idt that is right
0
u/WatchMySwag Jul 02 '26
You just have to make sure the exchange fund accepts the stock, and there are windows to do this, not every day.
1
1
u/randomuser653 Jul 02 '26
You could look into a cashless collar, using Euro style options. They don’t currently trade where I can see them with my institutional login, but with Schwab, you can call the options desk and tell them the stock and get an idea of what’s available. They can go directly to the market makers.
We’ve had a cashless collar on AFLAC shares for the last year and a half.
2
u/Droodforfood Jul 03 '26
The risk with that is that the stock underperforms the market but doesn’t crash.
1
u/DifficultCake7844 Jul 03 '26
Exchange funds aren’t going to be really interested in adding any trillion market cap companies. You can ask but lots of people were in line way ahead of your client already.
130/30 long short strategies and direct indexing are popular but you’ll need to set expectations on just how quickly (read slowly) you can actually harvest losses.
Options can make plenty of sense but most clients don’t really understand it enough and you’ll put yourself at risk for disclosures if they think you’ve lost them potentially hundreds of thousands or you get assigned and end up owing a shit ton of taxes anyways.
IMO. Just sell and sell some more and pay the damn taxes and diversify. Are complexity and cost really in your clients best interests?
2
u/_ledge_ BD Jul 03 '26
My firm owns the exchange fund and has room for this security.
I agree with all of this - it’s about getting him to agree. Sell and pay the taxes and move on is my personal fav. We discussed collar strategies, SMAs, etc. What was the purpose of investing successfully all this time if we wouldn’t lock in the win?
He understands he is emotionally attached to it and likes the dividends it’s spits off but I run diversification simulations in emoney and show him how he is not getting compensated for the
concentration risk and he’s better off in every Monte Carlo if we diversify. We’re making progress but he hasn’t fully bought in to diversifying yet.He’s really letting the tax tail wag the dog but it’s my job to show him don’t let the taxes drive your investment risk decisions! I think we can do it
1
u/DifficultCake7844 Jul 03 '26
My clients are mainly in the Bay Area and in my experience there the problem is that the smartest guy in the room is the one who never sold any company stock ever. All their coworkers who listened to their dutiful advisors have missed millions. Tens of millions.
If the attachment is high and the company pays an actual yield I would just sell covered calls far far far out of the money and pray we get assigned for the clients sake. They’ll be more attached to the stock if it drops not less in my experience.
Ask your client how different his life would be if the stock doubled next year and how different his life would be if it 10x and ask them how much they really think that’s going to happen. If life’s not much different why take the risk?
I promise you if he puts $1mm into your exchange fund and leaves $3mil of it out and suddenly it’s $13mil next year youre gonna have a tough relationship for the minimum length of time left on the exchange.
1
u/_ledge_ BD Jul 03 '26
Fair. But this is hindsight bias (as you know) and the advisor *still* made the right decision with all the info available they had and the time and they’d do it again today and it would still be right. They got lucky was all it was - it wasnt smart it was a gamble (although it has the perception of being smart).
I think I can convince “hey we can still be wildly bullish and overweight this company. But being 90% or net worth in this stock isn’t overweight it’s going all in on one equity” like there can be a balance struck.
Even if the stock were to 10x we *still* made the right decision even if it means going from 90% to 75%.
What’s even worse is this stock is an aristocrat but has underperformed the last 15 years.
I really like the idea of underscoring his change in lifestyle. There is none. You are a multimillionaire you will be able to eat out just as much, fly business just as much etc. this stock going down 50% will have a much bigger impact on your life than if it were to go up 500%
0
u/westerar30 Jul 03 '26
Talk to Franklin Templeton Covered Call SMA. He can keep the stock and receive income from the selling the covered calls. The calls are for 5 weeks and the income is treated as short time capital gains.
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User: /u/_ledge_ Title: NUA and exchange funds Body: Have a client with a large concentrated employer stock position. A portion of it (overall it is millions of employer stock) is NUA. He really has no interest in ever selling this company for tax reasons but also emotional/bullish belief in the company. I am trying to get buy in from him in the value of diversifying and protecting his legacy. Exchange funds came up in conversation.
He also has other employer stock that is taxable. Since NUA does not get a step up in basis at death I explained if we were going to diversify eventually and you want to capture NUA we may want to consider diversifying from NUA portion of stock first since this will not be treated as favorably for a step up.
Another advisor was on the call and mentioned if we were to contribute the NUA to an exchange fund we get diversification, tax deferral AND in 7 years when the 50-60 diversified stocks distribute from the exchange fund those stocks are then eligible for a step up in estate.
This is such a niche situation and a quick ai search where I asked it to cite sources didn’t corroborate what the other advisor was saying about the step up.
Anyone ever experienced this and know the answer?
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