An investor can fi nd him or herself holding a concentrated equity position for any number of reasonsinheritance, a sale of a business for stock, executive compensation or simply shrewd investing. Regardless of the source, concentrated equity positions can increase risk in an investors portfolio by putting too many eggs in one basket. If the equity in which the investor has a concentrated position declines signifi cantly, the impact on that investors wealth, and the fi nancial fortunes of the investors family, can be devastating. The recent collapse of former market stalwarts like Lehman Brothers illustrate the danger of holding concentrated positions.

Clearly, the advantages of moving away from an over-concentration are numerous. However, individuals holding such positions face a two-fold challenge. They must diversify their portfolio while eff ectively managing the substantial underlying tax costs. Balancing these two challenges in the context of each individuals unique circumstances and goals is the key to identifying the right strategy for each concentrated wealth situation.

The Potential Peril of Concentrated Positions

NETFLIX, INC.

In September 2011, Netfl ix announced its intentions to rebrand and structure its DVD home media rental service as an independent subsidiary company called Qwikster, separating DVD rentals and streaming. Less than a month later, following strong negative reactions from subscribers and investors, the company abandoned its plans. The stock price continued to slide, as business growth failed to meet expectations. All of those challenges left the stock down more than 70% below its peak of $304.79.

Understanding Goals

Aligning Strategic Alternatives with Individual Concerns

A number of techniques can mitigate the risk of a concentrated position and help to move toward a more diversifi ed portfolio. Each of these techniques addresses certain concerns that an investor might have regarding a concentrated position and is not universally applicable. Therefore, before action can be taken to address a concentrated position, it is important to identify the investors concerns, which might include:

• Need for liquidity or income to meet certain financial targets or obligations
• Desire to decrease portfolio risk through diversifi cation
• Tax impacts surrounding the sale of appreciated equities
• The charitable intent of the investor and his or her family
• Emotional ties to the security
• Company-imposed retention requirements

Identifying Strategies

Strategies for Managing Concentrated Positions

Usually, an investor has several of the concerns and issues previously identifi ed and, as such, the ultimate solution often involves several diff erent tactics. Once specifi c objectives and concerns have been identifi ed, a plan can be crafted, using the strategies described below to satisfy the investor and work toward a well diversifi ed portfolio.

Three primary approaches can be used to address a concentrated position:

1. Sell and Diversify

This strategy seeks to liquidate the concentrated position and redeploy the assets in a broadly diversifi ed portfolio. It addresses the issues of liquidity and portfolio risk, while taking advantage of current favorable federal long-term capital gains rates. There are several means with which to execute this strategy, including:

• Direct Sales Programs and Strategic Sales Structures Investor establishes a strategy for selling out of a stock at given price parameters, timing intervals or dollar targets. Limit orders and writing covered calls are often part of this strategy. Outright sales will take advantage of the lower long-term capital gains rate of 20%*. Variable Forward Sales Investor agrees to deliver shares of the subject stock at a future date and in return receives discounted proceeds currently. This structure allows capital gains deferral and possible participation in appreciation of the underlying stock.
• 10b5-1 Trading Plans

Insiders in a publicly traded company have unique issues when it comes to concentrated wealth. Generally, an insider is a senior person at the company who may have accumulated much of his or her wealth through direct purchases and equity awards, such as stock options and restricted stock. Insiders are prohibited from buying or selling shares of common stock of their company while they are in possession of material non-public information and often only are able to sell shares in their company during limited trading windows after the companys earnings announcements. This limited ability to sell company shares makes it very diffi cult for an insider to implement a wealth plan that calls for a diversifi ed investment portfolio. Rule 10b5-1 of the Securities Exchange Act of 1934, however, aff ords insiders a way to diversify their portfolio through regular sales, without running afoul of the insider trading rules.

The insider would develop a trading plan to control a certain number of company shares in accordance with his or her directions, i.e. sales at certain target prices or at certain dates. The insider would then sign the plan and place it with an institution for execution during one of the permissible trading windows. If certain targets are hit as specifi ed in the plan, shares can be sold even if the sale does not take place during a trading window. Once the plan is in place, however, the insider can have no further input as to the plan, other than the possible ability to terminate it.

The primary benefi t of a trading plan is the ability of an insider to diversify their portfolio in an orderly manner without taking the market risk of being confi ned to certain trading windows. Additionally, a trading plan can serve a public relations role. Making a trading plan public at the time of inception can inform Wall Street that future sales are part of a plan for diversifi cation and not an indication of lack of confi dence in the company.

2. Charitable Giving

Charitable strategies can aff ord signifi cant benefi ts in terms of deferral and savings on federal capital gains taxes while also allowing a family the opportunity to build a legacy of philanthropy. Charitable structures include:

• Charitable Remainder Trusts Investor funds an irrevocable trust that allows the investor, as the donor, and/or other designated individuals to receive annual payments for a specifi ed time period with the remainder interest passing to charity.
• Private Foundations Investor creates a non-profi t, grantmaking entity organized in furtherance of the investors charitable philosophy and objectives. Many of our nations largest foundations were founded with a single stock.
• Donor Advised Funds Investor works with an existing charitable entity to establish a fund similar in purpose and operation to a private foundation, but with less administrative oversight required.

3. Holding a Position and Diversifying through Borrowing or Derivatives

This strategy recognizes that factors, including emotional ties or a pending stepup in tax cost of the concentrated security, can make selling a stock undesirable. Borrowing or use of derivatives can allow the investor to retain some or all of the concentrated security while at the same time generating liquidity to diversify the investors portfolio or to meet other fi nancial needs. The primary tactics for executing this strategy include:

• Borrow and Reinvest Investor borrows funds that are secured by the concentrated position and reinvests those funds in a diversifi ed portfolio.
• Protective Put Options Investor pays premium for right to sell security at a certain price, providing downside protection by setting a minimum security price.
• Covered Call Options Investor receives premium for the sale of the obligation to sell security at a fi xed price, eff ectively increasing income from security but limiting their own ability to participate in stock appreciation.
• Equity Collars Investor sells a call and uses the premium received to buy a put in order to get downside protection.

Exhibit 1 on the next page summarizes how certain tactics address distinct needs or objectives that an investor might have.

Other Alternatives

In addition to the strategies and tactics previously described, commonly used wealth transfer techniques also can be employed to address a concentrated position by moving the securities to other family members or family entities. These wealth transfer strategies do not, in and of themselves, provide the necessary diversifi cation from concentrated positions. However, they do create new investment vehicles with new time horizons, risk characteristics and tax impacts. For this reason, they can be worthy of consideration in some circumstances. Some common wealth transfer techniques include:

• Grantor Retained Annuity Trusts
• Family Limited Partnerships/Family Limited Liability Companies
• Generation Skipping (Dynasty) Trusts
• Irrevocable Intentionally Defective Grantor Trusts

Concentrated positions in one security can build great wealth, however, they also carry great risk and can destroy a familys wealth without warning. A concentrated position deserves close attention and a well-thought-out strategy. It is important to emphasize that a single solution approach to managingor managing out ofa concentrated position is rare. The various vehicles or approaches available are simply building blocks of an overall strategy. What is most critical is to combine the practical knowledge and experience necessary regarding the fi nancial implications of various diversifi cation strategies with a very thorough understandingand analysisof the investors complete situation. Any plan must be tailored in light of the preferences, tolerances and goals of each investor and his or her family.

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The information provided is for illustrative/educational purposes only. All investment strategies referenced in this material come with investment risks, including loss of value and/or loss of anticipated income. Past performance does not guarantee future results. This material is not intended to constitute legal, tax, investment or fi nancial advice. Eff ort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or fi nancial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specifi c situation.

Pursuant to IRS Circular 230, we inform you that any tax information contained in this communication is not intended as tax advice and is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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