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December 04, 2009 |
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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.
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CONFERENCES
Dorothy 
