In working with cast members of The Walt Disney Company, I have found many have accumulated quite a bit of company stock. Whether it was participating in the employee stock purchase plan while it was offered or through the 401(k), Disney stock sometimes ends up being a concentration in their portfolio. By the time they meet with me, this tends to be an issue they’d like to address. Arguments can be made on the validity of the investment itself, which I will leave to a more personal conversation.
What I’d like to discuss today is if one would like to reduce exposure in company stock (whether it is The Walt Disney Company or another), what are some courses of action one may take, the implications associated with them and some things to think about.
Here are 4 potential strategies when dealing with reducing exposure to company stock:
1. Sell the stock from your employee stock purchase plan or transfer agent: This is probably the simplest thing to do. However, if you bought the stock through the employee stock purchase program, knowing your cost basis (how much you paid for the stock) is critical but might not be easily deciphered. For Disney, the transfer agent has changed several times over the years and cost basis information was not always necessary to keep. Understanding your cost basis though, will give you an idea of what your tax liability may be if you do decide to sell the stock. So, before you do any selling, you might need to do some homework on what you paid for the stock and what discount if any you were given at that time because there may be different tax treatments of the discount and gains.
2. Sell the stock within your 401(k): Often, I see clients with large balances of Disney stock in the 401(k). Which makes it nice if they want to sell the stock because within a 401(k), the taxes are deferred. The less obvious thing to consider before doing that though, is knowing what your cost basis is within your 401(k) if you own the company stock. Why? (You might ask thinking what happens within the 401(k) is deferred) I’m glad you asked. There is a little-known strategy called Net Unrealized Appreciation (NUA). Basically, this allows you, upon retirement, to move the company stock out of your 401(k) in-kind (meaning, as it is). When you elect this strategy, you would have to pay ordinary income taxes on your cost basis but then you're able to leave any/all of the unrealized gain, as unrealized until/if sold later. One would do this if they don't necessarily need the funds soon and would like to have a potentially more tax efficient source of income to pull from later or leave to the kids. Depending on your situation, this of course could be a good thing or bad thing but is good to consider before selling out of the stock within your 401(k). Some of the risks for this though are potential negative tax ramifications and if the value of the stock fluctuates unfavorably.
3. Income shifting: The old saying sometimes holds true that the “tax tail” ends up wagging the “investment dog.” Meaning, if you are making an investment decision, taxes do play a part, but the overall validity of the investment and how it fits into your situation is the more important consideration. However, when working with clients that have been with the company for 20, 30 or 40 years, there tends to end up being some bias towards keeping the company stock even if they have a “head knowledge” of the risks of over concentration. When we add on top having to pay taxes, that sometimes becomes too much to bear for any action to be taken. Therefore, a potential strategy is to shift income. What do I mean? For example, let’s say a client has $300,000 in Disney stock in their employee stock purchase plan and wants to begin reducing their exposure. They bought it many years ago and have large unrealized long-term capital gains. At the same time, they are not fully contributing to their 401(k) or other potentially tax advantaged accounts. Thus, they have, let’s say, $10,000 more they can contribute per year. As such, this client could potentially sell some of their stock they bought through the employee stock purchase program and contribute a similar amount into their traditional 401(k) to off set the income. There may even be other accounts they could do this with as well to increase further the amount of money they could put away pre-tax to diversify. The downside of this is paying long-term capital gain rates now (which may be lower), while moving a similar amount of money into funds that would be taxed later at ordinary income rates.
4. Gifting: In starting with the Walt Disney Company, it was great to hear about the Voluntears and some of the charitable endeavors cast members have available. What is not considered always, is instead of writing a check for charitable causes one cares about, many charities will accept a donation of stock. This may end up being a benefit in many ways. First, when gifting a stock with long-term capital gains, you may get a tax deduction on the full market value of the stock. Next, since you have gifted the stock, you did not sell the stock at a gain and thus realized any unrealized capital gains. Lastly, the Walt Disney Company (and other companies may as well) matches donations dollar for dollar up to $25,000 per eligible employee!
This certainly is not a comprehensive list of potential strategies to use, but hopefully it gives you a few things to consider.
When considering tax implications, it is always best to consult your tax adviser, as I am by no means a tax adviser.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.