One of the first documents we review in preparation for the client’s financial plan is their current and past tax returns. In this case, it was clear that opportunities at work and challenges at home were taking focus away from her investments. Her tax return revealed very low amount of savings at her employer sponsored retirement plans although she earned very high income and was taxed at the highest marginal tax bracket.

The return also showed high levels of taxable interest, short-term capital gains and tax-deductible investment advisory fees that approached 2.5% of her total investment assets. We showed her that just by converting the taxable interest into tax exempt income by rebalancing her fixed income investments into high quality municipal bonds, eliminating short-term capital gains and moving her investment management fees down to a market level of 1% of investment assets she could have saved close to $50,000 in taxes in the previous year. We also counseled her to make the maximum allowable contribution into her company sponsored retirement plans.

The job offer from a large, publicly-traded competitor was shockingly good from a financial standpoint, and would provide her with a challenge of her career to turnaround an underperforming segment of this large healthcare consulting firm. The job offer from a large, publicly-traded competitor was shockingly good from a financial standpoint, and would provide her with a challenge of her career to turnaround an underperforming segment of this large healthcare consulting firm.

The offer contained provisions for both stock options and restricted stock grants. However, the inherent leverage in stock options and the restricted stock would leave her with a highly concentrated stock position in the firm. Trying to keep enough “skin in the game” to satisfy her new employer while being able to provide for a more diversified investment portfolio was a challenge that we helped her navigate.

When you consider reducing your exposure to a concentrated stock or employee-stock-option position, you may encounter any number of rules of thumb that seem logical, but are arbitrary. For instance, selling a portion of the stock each year or every time it climbs 10 or more points; or always holding options until expiration regardless of the risk to your overall net worth.

At Benchmark Investment Advisors, we think only one rule really makes sense: Reducing your exposure to a prudent level, while incurring the lowest costs that you might otherwise avoid.

This simple concept is the basis for our proprietary analysis of concentrated stock and employee-stock-option positions, which reveals:

• What your concentrated position is worth, before and after the taxes you must pay on options and restricted stock grants;
• The extent of your single-company exposure, considering the inherent leverage of options; and
• How to reduce your exposure cost-effectively.

We’re not suggesting that there’s one right answer. Your decision may certainly be influenced by company policy, your opinion regarding the potential success of your company or considerations raised by your tax advisor. But our model does provide a logical, quantitative framework with which to approach your analysis.

In this client’s case we were able to suggest a shorter restriction period on the sales of either stock or options, a shorter vesting period, and a higher percentage of her overall position in the options and company stock that she could sell in any given year.

To improve her commute to her new job a move to the Oak Brook/Hinsdale area was being contemplated and their home on the North Shore was too big for her husband, especially considering he was not going to be the primary care giver to their two children. As opposed to giving the North Shore home to either the husband or wife, we suggested a sale during the remaining portion of the calendar year and that they file a joint return for the current year.

If you have a gain from the sale of your primary residence, you may qualify to exclude up to $250,000 of that gain from your income. You may exclude up to $500,000 of that gain if you file a joint return with your spouse. Their forecasted capital gain on the North Shore home was approximately $500,000. If either of them filed as a head of household or as a single tax payer they would lose out on their former spouse’s Homestead Tax Exemption of $250,000 and would needlessly incur an additional $59,500 in capital gain taxes.

They sold their existing home, filed a joint return, and utilized the liquidity generated by the sale to provide for a more flexible and effective settlement of their marital assets during the divorce.