Subscribe
FA News
December 04, 2009
Creative Risk Mitigation
(Dow Jones) Adviser Mitch Silberman's client was worth about $5 million and, at age 62, thinking about retirement.

She knew her portfolio was over-concentrated in equities. What's more, her stock holdings consisted almost entirely of her employer's shares.

Silberman, who is president and CEO of Silberman Wealth Management in Westlake Village, Calif., had something of a specialty in working with people in her situation: female scientists who built accomplished careers at biotechnology giant Amgen. Almost uniformly, they ended up with concentrated portfolios of highly appreciated Amgen stock.

"These women had paid a pound of flesh for their stock options," Silberman says. "They're very conservative, humble and frugal; they tend to spend a lot less than they make."

In short order, Silberman referred her to an accountant and an estate attorney, then convened a joint meeting with the client and all three professionals. It didn't take long for the group to agree that her over-concentration exposed her to significant risk. Trouble was, selling the company stock and distributing the proceeds from her 401(k) would result in an enormous tax hit.

Silberman proposed that the client take advantage of net unrealized appreciation rules, which allow individuals to transfer shares of company stock from a 401(k) to a taxable account and pay income tax only on the original cost basis—not on the shares' current value. When she sells the shares, she pays the long-term capital gains rate, and not the higher ordinary income tax rate, on the appreciation.

"This client ended up paying taxes of 15% on most of the shares' value, rather than the combined 40% state and federal tax she would have owed," says Silberman. "Both she and the CPA loved the idea."

Silberman then recommended the client put $1 million of the Amgen shares in a charitable remainder trust, which would sell them and reinvest the proceeds. She would take a 5% annual payout from the trust to support her living expenses, and would gain a large tax write-off. Upon her death, the funds remaining in the trust would be distributed among four charities she had selected.

He then set about crafting a portfolio that could produce income for living expenses while protecting the client's capital.

Silberman likes to combine marketable securities with nontrading assets to manage risks. When market participants panic, he contends, the nontrading assets are more likely retain their value. So in addition to investing through separate accounts, he put 20% of the client's portfolio in some relatively illiquid REITs.

"They don't trade on an exchange," he says. "That helps them retain their share price, and in the meantime they pay a 6% dividend net of fees." He also established a position in a trust deed mortgage pool, which makes loans to commercial real-estate developers, and bought a managed futures fund with a very low correlation to stock market returns.

Finally, he suggested that the client use the proceeds of a small IRA to buy a tax-deferred variable annuity with a guaranteed death benefit. The annuity would provide lifetime income for the woman, and upon her death her beneficiary, a nephew, would inherit the guaranteed death benefit amount.

While the portfolio Silberman created is complex, he says his client is delighted with the results.

"Since she retired, she's gone traveling around the world," he says. "It's hard to get her to come in and see me, and that's the biggest compliment I could get."

Copyright (c) 2009, Dow Jones. For more information about Dow Jones' services for advisors, please click here.

 

 
Comments
Please login to write comments.

3.26 Copyright (C) 2008 Compojoom.com / Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."

FAgreen-0910
Click Here

Private Wealth magazine
Click Here

Online Extras

Don't Short Shorts
Here's how men can give shorts a polished look so that they work for business or dinner attire during the summer.
Read more...
 
Social Security Benefit Considerations
Most people are confused about the many variables and calculations that affect how much money they will receive from Social Security and when. But if your clients make the wrong choice it can mean losing tens of thousands.
Read more...
 
The Psychology Of Retirement Planning
Decoding your clients’ financial behavior can be challenging. Here's some advice.
Read more...
 

Market/Economic Commentary

No Lazy Summer Days For The Market This Year
Deflation is possible, and increased taxes are on the way for the highest earners, says the president of Wilmington Trust Investment Management.
Read more...
 
Don’t Worry, Be Happy
Investment Strategy
Read more...
 

 





 


Financial Advisor magazine on twitter

LinkedIn-logo

Financial Advisor magazine on Facebook