Our Investment Management, Wealth Transfer, and Senior Care Services professionals took the time to develop a lasting solution for a client full of life.
Meet Mrs. Stanley.
Mrs. Stanley is a widow in her mid-90s. She is in good health, has a great outlook on life, and a history of longevity in her family. Her husband and two adult children have already passed but she has 9 adult grandchildren and 18 great-grandchildren. Mrs. Stanley recently moved to San Antonio to be near her favorite granddaughter, who is a busy professional. She has no other family locally.
Analyzing the situation.
When Mrs. Stanley came to us in 2005, she was looking for assurance that she had enough resources to provide for her lifetime. She has an existing Revocable Trust and was looking for a firm that would handle bookkeeping, custody of her securities, and bill paying. She wanted to be actively involved in making decisions.
She was not aware of any other challenges concerning her assets, but when we saw her statement, we found them. Her portfolio was in desperate need of diversification.
One particular stock, with a very low cost basis, made up 57% of her total portfolio. The entire portfolio consisted of 91% stocks, 4% bonds and 5% cash, and the value of her estate exceeded the current exemption for federal estate tax making her approximate tax liability about $200,000.
We talked with her about her family, the history of the over-concentrated stock, and the slightest possibility of giving.
She was emotionally attached to her stock and initially did not want to consider divestiture in any form.
She had been thinking of gifting to family but wanted to gift with cash. A couple of the more savvy grand children were urging family gifting, but this only caused Mrs. Stanley to become suspicious and reluctant to take any action.
The plan.
We prepared a cash flow statement and ran income projections on various asset allocations. We also ran several projections of the overall impact on the portfolio of a decline in the bank stock and computations of federal estate tax liability without a gifting program.
Because of capital gains, we proposed a diversification strategy of reducing the stock by 15% over a 7-year period. We recommended that a “collar” strategy be put in place to protect against downside risk.
Mrs. Stanley had outside income to cover her expenses, so we recommended a fairly aggressive investment objective of growth and income that should ultimately benefit her heirs.
The eventual target asset allocation would be 60% stocks, 35% bonds, 5% cash. This will take some time to implement because of the large over-concentration. Proceeds from the stock sales will be invested primarily into individual municipal bonds in order to increase tax-free income. In the future, some equity funds may also be used to increase diversification.
We also proposed a gifting plan to her family of shares of stock to reduce the over-concentration and begin transferring wealth to younger generations.
The information was packaged and given to Mrs. Stanley and her granddaughter for them to study at their leisure.
Implementing the strategy.
Initially, Mrs. Stanley agreed to the 7-year reduction plan and the collar strategy – everything but the gifting.
Within 3 months of opening her account, we sold 15% of the stock and placed protective option strategies. With the proceeds we purchased individual municipal bonds.
In addition, after we were able to thoroughly explain the financial impact of gifting, Mrs. Stanley was able to make an objective decision. Before the end of the first year, she saw the practicality of gifting and gifted 6,400 shares of the stock to her family. This year she has gifted another 3,000 shares to family and 700 shares to charities for a total reduction of over-concentrated position of 15,600 shares (including sale).
The final analysis.
The price of the stock has since declined. If Mrs. Stanley’s portfolio had still been holding the 57% concentration, it would be down over $600,000.
As a result of the gifting program, the taxable estate has been reduced and her grandchildren and great-grandchildren will ultimately net more as beneficiaries of the estate. Gifting has provided for the younger generation at a time when it was much needed.
By taking the time to help our client understand what could and should be done, we were able to reduce the likelihood of estate erosion due to exposure from over-concentration, lack of diversification, high income taxation, and over-aggressive asset allocation.
We continue to monitor the status of Mrs. Stanley’s portfolio and have periodic meetings with her and her granddaughter to keep them informed.
