Case Ideas

[Trent]

Prospect inherited 9 individual(all large blue chips companies) stocks in 1974 with an extremely low cost basis. Think Exxon Mobil at $2 a share! He has these stocks in his trust but they comprise 85% of the value of the trust ($2,400,000) and 60% of his entire net worth. He is 68 years old and had a quadruple bypass 12 years ago and a pacemaker inserted in 2004, so his health is not very good and uninsurable. His wife is 10 years younger than him and they are living off the dividends (approx $50,000 yearly, SS$ 19,000 annually and the occasional withdrawal from his IRA which has a balance of about $125,000.

He had been gifting $24,000 annually to his 4 kids but that will stop this year due to large long term cap gains issues. His entire net worth is about $3,350,000 and he is not charitably inclined.

I was looking at doing some covered call writing to garner a few more bucks but I am having issues with my B/D since they will not notify me if and when a position might get assigned, they will just automatically assign the shares which of course I do not want to have happen because of causing a taxable event for this client. I even asked them if I put enough cash in a margin account to buy the same number of shares at market price as to avoid a large long term cap gain and they said no. Does anyone have any other ideas except wait for him to die and then reallocate the portfolio.

thanks for the input.

[dkennedy]

I have no idea what you and your client are trying to accomplish.

It sounds like an income/diversification/tax issue, but I can't be sure.

How do you know he is uninsurable? Did you fill out an application? There are insurance companies that will consider him in spite of his health history.

What are his goals? NOT money-based, but what can his money do for him?

[Trent]

I am looking for ways to increase his income if possible, protect his portfolio from potential downdrafts without causing a massive taxable event.

[tpondel]

I would re-balance. The current cap gains rate is cheap. If the majority of his net worth blows up due to the next Enron, sub-prime, dot-com or whatever comes next, the taxes are going to look like a steal.



Amber

[dan]

What kind of trust is holding these assets? I'm guessing it's a living (revocable) trust?

What does this couple's balance sheet look like? You mention a net worth of $3.35 million, which includes a trust account worth $2.4 million, an IRA of $125K, and ... ? What makes up the remaining $825K?

Re: diversication - One often-overlooked strategy of diversifying out of low-basis stock is to simply sell some of the positions and, gasp, pay the capital gains tax. We're at historically low capital gains tax rates now, and often an argument can be made that the certain tax bill does not "cost" as much as the potentially liability of holding a few concentrated position.

Re: additional income - how about systematically liquidating some of his holdings in order to provide the desired level of income? Also, depending on the makeup of the rest of his balance sheet, an immediate annutiy may be a reasonable option.

- DDB

[Trent]

DDB, yes it is in his revocable living trust and the balance of their net worth is their home which they own free and clear. They have been selling mutual fund shares as needed to supplement income gaps at the lowest possible tax gains to them. I was putting this out there for others to view and to see if I was missing anything but it appears there is not much to be done.

Their biggest holdings are some of the oldest and biggest of blue chips: Exxon, Monsanto, Pfizer, J&J, United Technologies, Proctor & Gamble, 3M, Merck and GE. Although there is always the possibility of 1 or more of these blowing up, I think the probability of that happening is extremely small. Like I said, his health is not that good and when he does pass away, that will be the time to totally reconstruct his holdings.

[wsymons]

Trent:

I like your idea of covered calls. I would ask your B/D if they would allow you to do a sale vs. purchase. When I get called, I buy the share for delivery at the time I am called.

Symons

[Mr. Bill]

What about the stocks to cash program?