Question: Hello! I'm 39 years old and was gifted a large amount of shares of Weyerhaeuser stock when my dad died 38 years ago. I recently got married and my husband and I started working with a financial planner. He was reviewing my individual portfolio and he pointed out that I have a large amount of Weyerhaeuser stock. He strongly advised me to sell the shares and diversify. I don't know the cost basis of the Weyerhaeuser stock off hand, but I am sure if I sold the stock, it would be a significant capital gain.
I do have another investment portfolio (mutual funds) and a 401k. I am a shareholder-employee of my family business, which is an S-corp. My 2007 salary was $90,000 and my 2007 AGI was about 67,000. However, I received a pay increase as of May 15th 2008, I am now earning a $120,00 annual salary.
I am worried about selling the stock and the resulting tax implications of the capital gains tax on the sale of the stock, my increase in income and corporate profits..
Furthermore, if the Democrats are elected to the White House in 2009, the capital gains tax is going to rise. Even diversifying my porfolio, I still am incurring risk. What would be the advantages/disadvantages if I held on to it. I know I will eventually have to pay the capital gain tax, but I want to minimize my overall taxes owed. I'm frozen by my indecision, please help if you can!! First Name: Jenifer, Seattle, WA
Answer: I don't have enough information on your portfolio and Weyerhaeuser to get into detailed specifics, but I do have strong thoughts about the idea that you should diversify at least a portion of your portfolio. I agree.
Remember Enron? Bear Stearns? How about Fannie Mae and Freddie Mac? These companies expose the risk of having too much of your portfolio in any one stock.
For instance, with Enron, not only did some 4,000 workers lose their jobs, but many more watched their retirement savings decimated by the energy company's collapse. Enron's employees had invested a big chunk of their tax-deferred retirement savings in Enron stock. The employees at Bear Stearns had invested a big chunk of their income into the well-regarded Wall Street firm, considered one of the savviest risk managers among investment banks. Yet the government ended up engineering a bailout of the firm, and employees lost much of their savings. Until recently, mortgage giant Fannie Mae was among the bluest of blue chip corporations in the world. Yet it has been caught up in the credit crunch and its stock price has cratered. According to a recent article in the New York Times, Fannie Mae "workers had $116 million in the employee stock ownership plan at the end of 2006. Today, it's more like $17.5 million. Ouch."
I could multiply the examples, but you get the point. This doesn't mean you have to get out of Weyerhaeuser completely, but that you should consider making one stock a smaller portion of your overall portfolio. I'd add that my philosophy is that while it's sensible to minimize the tax take, no one with a profit has gone broke paying taxes.
That said, there is a lot you can do to save on taxes. For instance, you may have some long-term capital losses to offset the gain. You may also try and time the sales to spread out the tax hit. But this is the kind of tax strategy a professional can help you engineer.