When you hold an appreciated asset—stock, real estate, or a business—the desire to avoid capital gains tax is a powerful reason to hesitate. But holding means bearing excess risk without compensating return.
Excess risk is risk for which the holder cannot expect to be compensated. Between 1980 and 2020, 44% of stocks in the Russell 3000 experienced at least one episode of “catastrophic loss” in which they dropped by 70% or more.
The average top combined federal and state capital gains rate in the U.S. is approximately 30%. In California and New York, the effective rate can approach 38–40%.
Below, we examine the commonly discussed solutions for concentrated stock positions.
Sell the stock and reinvest the after-tax proceeds in a diversified portfolio.
Spread the sale over multiple tax years.
Contribute appreciated stock to a partnership.
A complex bank contract.
Buy individual index stocks in a separately managed account.
A tax-exempt trust under §664 of the Internal Revenue Code.
Sell the property for cash.
Exchange one property for another.
Sell for cash plus a note.
A tax-exempt trust under §664.
Sell the business for cash.
Exchange stock under IRC reorganization.
Sell for cash plus a qualifying note.
A tax-exempt trust under §664.
| Strategy | Income Taxes | Asset Protection | Control | Non-Tax Costs | Liquidity | Time Frame | Tax Reduction |
|---|---|---|---|---|---|---|---|
| Outright Sale | High | None | Complete | De minimis | Complete | Immediate | Maximum tax |
| Sales Over Time | High | None | Phased in | De minimis | Phased in | Phased in | Available (phase-in) |
| Exchange Fund | Deferred until withdrawn | None | None | ~1.5% upfront + ~1%/yr | Limited | Must last ≥7 years | May be funded with overvalued securities |
| Prepaid Variable Forward | Deferred; may have tax risk | None | None | Variable to high | Depends | 2–5 years; must renew or pay tax | Good if done right, but temporary |
| Direct Indexing | Deferred only; basis reduced | None | Moderate | 0.30–0.40%/yr plain; ~1.0–3.0% enhanced | High | Ongoing; benefits decay | Front-loaded; decays as portfolio appreciates |
| Tax-Exempt Trust (§664) | Deferred until withdrawn + upfront income tax deduction | Yes | Very high | Small upfront; ~0.5%/yr | Limited | 20–60 years | Very high; wide range of permitted investments |
“Any one may so arrange his affairs that his taxes shall be as low as possible.”Learned Hand
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