Tax-Efficient Strategies for Bay Area Executives to Diversify Concentrated Stock Positions

For many successful Bay Area tech executives, the biggest financial blessing can also be the biggest source of stress: a concentrated stock position. Years of hard work and belief in your company have created significant wealth, yet much of it remains tied up in a single stock. That can feel both exciting; knowing your shares may still have room to grow… and daunting, given the risks of having too much of your future riding on one ticker.

At the same time, you may be thinking about how to translate this wealth into meaningful goals: buying a vacation home, helping family members, supporting your community, or even becoming “work-optional” years earlier than you imagined. Achieving those milestones typically requires liquidity and diversification. The challenge? Selling down stock often triggers steep tax consequences, particularly in California, where combined federal and state rates can claim nearly half of your gains if not managed carefully.

The good news is that there are tax-smart strategies available to reduce that drag and help you unlock freedom from a concentrated position without abandoning your faith in the company’s growth. At Summitry, we believe the key isn’t just in the strategies themselves, but in taking a planning-first approach by stepping back to define what success looks like for you and then tailoring the right tools to get there.

First and foremost, before you take any action to diversify out of concentrated stock positions, ensure that you and your advisors are aligned on your specific reasons for selling and what you want to accomplish with the proceeds. Where are you in life and your career? Where do you want to be in 10, 20 years? What do you want your wealth to accomplish? What do you want your lifestyle to be going forward? What do you want to avoid? The answers to those questions can be very different for each person. Think through them carefully and be crystal clear on your vision before executing on any of the strategies below. Again, it is critical to work with a firm that is planning focused, and not just “solutions” focused, as it is important that your team of advisors understands the “big picture” of your wealth and overall goals.

For many tech executives who are at the point of being “work optional” or are on the cusp of retirement, a steady stream of income that supports their lifestyle goals for many years / decades to come becomes very important. Certain types of trust structures can accomplish that. Trust structures are also core to effective estate planning, particularly minimizing estate tax.

For example, a Charitable Remainder Unitrust (CRUT) is a type of trust that provides income to one or more beneficiaries for a specified period, with the remaining assets eventually passing to a designated charity. The income is tax advantaged from the CRUT, and the funding of the CRUT creates an additional charitable deduction that can be used for further diversification. It can be a great way to make a charitable gift while also receiving income for yourself or others. 

With a long-short investing strategy, the goal is to create realized capital losses that can offset capital gains (such as from a concentrated stock position) and provide diversified market returns. This is smart and prudent investment strategy that is done through dynamically managing long and short equity exposure. With long and short positions you are not only achieving diversification but you also are able to participate in strategic tax-loss harvesting, which will allow you to reduce concentrated stock position over time. This strategy can be customized to accelerate the time frame to diversify out of concentrated stock.

Another tax deferral strategy that can be leveraged by executives with concentrated stock positions are Qualified Opportunity Zones (QOZs), which are tax-advantaged investment tools designed to defer and potentially reduce capital gains tax (which are produced when selling out of concentrated stock positions). QOZs enable investors to defer taxes on gains (including from stock) by investing in development projects in one of thousands of distressed areas across the United States that have been identified as “opportunity zones” as a part of the Tax Cuts and Jobs Act of 2017, which has recently been updated with the passing of the OBBBA. When investors redeploy capital gains (such as from selling concentrated stock positions) into a QOZ investment, the capital gains tax on that investment is deferred, with the added benefit that the new investment (the QOZ investment) potentially being completely tax free if held for the required amount of time.

Two options strategies that can help tech executives reduce the risk of their stock positions dropping include collar strategies and overlay strategies.

An options overlay is an actively managed strategy for stocks that is designed to enhance total returns and generate incremental income. It can be a great fit for an executive who wants to generate additional returns or income without selling a concentrated position.

A collar strategy is a type of options strategy that can provide short-term downside protection. This strategy offers a cost-effective way to protect against losses but limits some of the upside potential when the underlying security increases in value. In other words, a collar option strategy can limit both gains and losses.

While many successful Bay area tech executives can hopefully expect their stock options to continue to increase in value, it can also be wise to thoughtfully diversify out of overly concentrated stock positions to meet both current and long-term financial goals. Through considerate planning with a qualified team of advisors, that balance can be achieved, helping to secure your long-term vision and legacy.

This article contains opinions which are subject to change without notice. The reader should not construe these opinions as a recommendation to invest any security or as investment or financial advice. This is not a recommendation to purchase or sell any securities. Individuals should discuss their unique situations with a financial advisor and accountant.