Alexandria and Will were the remainder beneficiaries of their mother’s irrevocable marital and bypass trusts, while their father was the current income beneficiary. The trusts were comprised of concentrated stocks bought at a low basis. Both Alexandria and Will were worried that the portfolio wasn’t diversified enough – but that selling equity to diversify would result in paying high taxes. As a result, they set an annual “capital gains” budget and then sought the help of Bordeaux Wealth Advisors’ investment professionals to diversify the portfolio.
BWA’s team sought to address their situation holistically, so they reviewed the trust document as well as the Form 706 tax return of the estate that created the trust. In reviewing the documents, BWA noticed that both the marital and bypass trusts were passed to the father’s estate. This meant that when their father passed away, the cost-basis of the equities would be stepped up to their present value. If they waited until their 85-year-old father passed to sell the stocks, they would not have to pay any capital gains tax on them, sparing them from having to use their capital gains budget and immediately saving them approximately $100k.
However, they still faced an issue: the current portfolio was extremely concentrated in equities and at risk of losing value in a market downturn. How could Bordeaux Wealth Advisors help Alexandria and Will balance their portfolio without selling and incurring onerous taxes? BWA’s advisors came up with a plan to borrow on margin (which was under 2%) to invest in suitable alternative investments, including institutional real estate, structured notes and fixed income assets. This plan had the potential to both increase returns and diversify the portfolio without paying excessive taxes.
As with all clients, BWA first focused on understanding Alexandria and Will’s goals. They worked to gain a complete grasp of the situation which involved both a knowledge of estate and tax laws. BWA’s creative investment solution saved the family on taxes while achieving the goal of a well-diversified portfolio.
