With capital gains tax rates at their lowest since 1941, advisers are urging clients to sell legacy stock. But many clients, like one man who held more than $100,000 in Chevron stock first bequeathed 20 years ago, take considerable convincing. Emotional ties may make it hard to let go.
Financial adviser Michael Carroll at Payne Capital Management, a fee-only adviser in Manhattan with $260 million in assets under management, recommended in August that the man part with some of his Chevron stash and spoke with him over the next three months to explain why it made sense.
The man had reinvested dividends from the inheritance automatically, and the position grew. His tax cost basis in each share was only $15, so with Chevron trading near an all-time high (above $100) when he sold in November, he faced a large capital gains tax.
Right now, the top federal long-term capital gains tax rate is 15% until the end of 2012 unless Congress steps in. Many people--those in lower tax brackets--will pay nothing in capital gains taxes. Advisers think rates are likely to rise to 20% or higher in 2013, or even sooner, given efforts to change taxes by the supercommittee in Washington.
"You could be looking at 25% or 30% capital gains rates," Carroll told his client.
Another reason to sell: A volatile market makes it especially smart to diversify. And even companies with a long history of paying dividends, like Chevron, may cut or stop paying them when times get tough.
Finally, the man decided to sell some shares.
Old shares can take on symbolic meaning and become almost like an heirloom, according to Marty Martin, associate professor at DePaul University and financial psychologist at Aequus Wealth Management Resources in Chicago. Guilt or sadness may come up at the idea of selling.
Stephen Horan, head of Private Wealth at the CFA Institute, suggests asking clients: "If you were handed a check for the value of this stock, would you use the money to buy the same amount of the stock right now?"
Few people would choose their current old stock holding over cash, he says.
Or, an adviser might suggest that a client with an old gift of stock from a parent sell some of it, and give the amount of the original gift to the parent's favorite charity.
Once a person gets over the hump and sells, there may be a lot of profit that advisers can help invest.
Walter Pardo, a financial adviser in Basking Ridge, N.J., who manages more than $30 million, is in the midst of helping an octogenarian who recently parted with some Avon and General Electric stock inherited from his parents. For many years, he held on to the shares, his only equity investments, as their value rose and fell. Now, with Pardo's help, he will sell, and put the profits into a trust to help transfer them to the next generation with less tax.
Cost basis for inherited stock is the value of the shares on the death date of the person who bequeathed it. Old gifts of stock may yield even bigger tax savings because their cost basis derives from the price the original owner paid, taking into consideration mergers, spinoffs and stock splits that occurred at the company in the years since.