Tax Planning Starts Earlier Than Most People Think
Lessons from the Road
An executive can begin January with a concentrated stock position that has been sitting in the portfolio for years.
There is usually plenty of time at that point. The position has already survived another December. The tax return for the prior year is still being prepared. A decision about the stock can wait.
Then the year moves.
By the time I am having the same conversation in late summer, very little about the stock itself may have changed. The executive still owns it. The reasons for reducing it are still there. What has changed is the amount of year left to work with.
That is one of the reasons I prefer to think about taxes long before filing season.
Tax planning gets much harder when it begins after the financial decision has already been made. At that point, the conversation tends to be about consequences. Earlier in the year, there is more room to think about the decision itself.
That distinction matters for biotech and pharmaceutical executives because a meaningful portion of wealth can remain connected to compensation decisions made years earlier.
A stock position may have started with an equity award and grown steadily from there. Somewhere along the way, it became important enough to affect the rest of the financial plan. The tax consequences of selling can become large enough that they begin influencing whether anything happens at all.
I have seen that influence become stronger over time.
An executive may already feel that the position is too large. Then we look at the embedded gain. Suddenly the decision carries another number, and that number can become difficult to separate from the original reason we started talking.
I usually want to separate them for a while.
The investment decision deserves its own discussion. The tax consequence deserves one too. Eventually they have to come back together, but combining them too early can make the tax cost feel like the entire decision.
It rarely is.
This is where coordination with a CPA becomes valuable to me. I may understand what the position is doing inside the financial plan, while the CPA has a much deeper view of the current tax picture. When those conversations happen during the year, we have more room to understand the tradeoffs before the calendar begins making choices for us.
There are years when very little changes.
There are also years when an executive reaches October and realizes the financial picture looks different from the one everyone discussed in January.
I try to avoid waiting for October to discover that.
That means tax planning sometimes enters conversations where taxes were barely part of the original subject.
A client may come in wanting to talk about company stock. We can spend most of the meeting on the position itself before the tax picture becomes relevant. Once it does, the conversation usually gets more specific because we have already established what the client is trying to accomplish.
I prefer that order.
Starting with taxes can push the planning toward optimization before we have decided what deserves to be optimized.
That is an easy trap.
An executive can spend years protecting an appreciated position from a tax bill while the position itself becomes increasingly important to the family’s financial future. The tax savings are visible. The cost of continuing to carry the position is harder to measure with the same precision.
Both still belong in the decision.
Over time, I have become more interested in that tension than in any individual tax technique.
People tend to make better financial decisions when they understand what each decision is serving. If the goal is to reduce reliance on one company, the tax strategy should support that work. If the family has a different priority, the answer may change.
The important part is knowing which objective came first.
This also changes as people move through their careers.
The stock position that felt appropriate five years ago may still be the same stock position. The person holding it has changed. The family may have changed too. A financial strategy that once made sense can remain in place simply because nobody has had a reason to reopen it.
Taxes can make that inertia stronger.
That is why I think year-round planning matters.
It gives us more chances to revisit old decisions while they are still decisions.
By the time a tax return is being prepared, much of that flexibility has passed. The return records what happened. I want the planning conversation to happen while there is still time to influence what comes next.
For executives with meaningful equity compensation, that conversation can begin much earlier than people expect.
Sometimes January is exactly the right time.
Contact Info
Leon Shelton
Shelton Madsen Wealth Management Team
(610) 810-0444
Wayne@kingsview.com
Investment advisory services are offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. Insurance products and services are offered and sold through Kingsview Insurance Services, LLC (“KIS”), by individually licensed and appointed insurance agents. KWM and KIS are subsidiaries of Kingsview Partners.
