Investors are shifting their focus towards not just where they put their money, but also how to enhance their after-tax returns. Allspring Global Investments is aiming to guide investors through this complex tax and estate planning environment.
Having concentrated stock positions can lead to unnecessary risks in an investment portfolio. Even though there are risks, emotional factors and the concern about capital gains taxes often deter investors from diversifying. However, once they realize several tax-efficient strategies exist, they might be more inclined to reduce their concentration risk.
Holly Swan, a tax expert at Allspring, recently discussed ways to diversify concentrated positions tax-effectively. She categorizes tax management strategies into three main areas. It’s interesting—she uses terms like “be,” “d,” and “ah” that may not mean much at first glance, but they probably resonate more deeply with those in the know.
One approach emphasizes avoiding capital gains altogether. This can happen when investors retain certain high-value assets, allowing them to pass these on and benefit from a stepped-up basis.
Some usual lifetime strategies include borrowing against a portfolio to maintain liquidity without triggering taxes, gifting appreciated assets to family members with lower incomes, and employing options to manage risk without needing to sell. Additionally, a less common tactic allows early-stage investors to exclude substantial capital gains by investing in small businesses.
Another area involves tax deferral strategies, which help smooth out the tax burdens over time. For instance, systematic diversification involves gradually selling portions of highly concentrated positions, particularly useful for executives with large stakes in their companies.
There’s also potential to recoup losses through tax loss recovery, which can offset profits now or in the future. Other tools include exchange-traded funds, where investors can swap concentrated stocks for diversified portfolios, delaying immediate tax implications. Looking ahead to 2027, there are plans to allow capital gains deferral for up to five years in some cases, particularly in designated opportunity zones.
Offsetting strategies come into play to lower tax liability by balancing profits with deductions. Charitable donations are a prime example; by contributing appreciated securities held longer than a year, investors can bypass capital gains while benefiting from a deduction equivalent to the assets’ fair market value.
There are numerous avenues for tax-efficient diversification, each allowing investors to step away from high-risk concentrated positions. Allspring Global Investments can provide more insights as individuals navigate their financial futures.
