Converting a Single-Stock Position into Lifetime Income

For successful executives and early employees at high-growth companies, a common financial challenge emerges: how to handle a concentrated stock position that represents a significant portion of their net worth. While these positions can create substantial wealth, they also present concentration risk that can threaten financial security. This case study examines how one tech executive used a Deferred Sales Trust (DST) to transform a volatile single-stock position into reliable lifetime income.

Meet Sarah: The Tech Executive with a Concentration Problem

Background

Sarah joined a promising tech startup in 2012 as VP of Product Development, receiving a modest salary but substantial stock options as part of her compensation package. Over eight years, the company grew exponentially, eventually going public in 2020. After the IPO and lockup period, Sarah found herself with stock worth approximately $4.8 million, with a cost basis of just $320,000.

The Dilemma

While celebrating her newfound wealth, Sarah faced a classic dilemma:

• Concentrated Risk: Nearly 85% of her net worth was tied to a single company’s performance
• Tax Concerns: Selling would trigger approximately $1.07 million in federal and state capital gains taxes
• Income Needs: At 52, she wanted to retire early and needed sustainable income
• Market Timing: Tech valuations were at historic highs, raising concerns about future corrections
• Emotional Attachment: Having helped build the company, she felt conflicted about selling completely

Sarah’s financial advisor had suggested conventional approaches:

• Selling everything immediately and paying the tax
• Selling gradually over several years to spread out the tax impact
• Complicated hedging strategies with significant costs
• Holding indefinitely and hoping for continued growth

None of these options balanced her needs for risk reduction, tax efficiency, and income generation.

The DST Solution Exploration

After researching alternatives, Sarah discovered the Deferred Sales Trust concept and consulted with a specialized advisor to explore this approach.

Initial Assessment

The DST advisor conducted a comprehensive analysis, determining:

• Potential tax deferral: Approximately $1.07 million
• Income potential: $16,000-$20,000 monthly based on trust principal
• Risk reduction: Complete diversification from single-stock exposure
• Estate planning advantages: Significant for Sarah’s two children

Strategy Development

Working with her advisory team, Sarah developed a customized DST strategy focused on four primary objectives:

1. Immediate Risk Reduction: Complete exit from the concentrated position
2. Tax-Efficient Transition: Deferral of capital gains taxes
3. Reliable Income Creation: Monthly distributions with growth potential
4. Preservation of Opportunity: Maintaining some technology sector exposure

Implementation Process

Phase 1: DST Establishment (30 Days)

• Trust Structure: Created DST with appropriate legal documentation
• Trustee Selection: Chose independent trustee with technology and investment expertise
• Sales Agreement: Developed installment sale contract with terms aligned with income needs
• Investment Policy: Established investment parameters balancing income and growth

Phase 2: Stock Transfer Strategy (60 Days)

Rather than selling all shares at once, Sarah’s team developed a strategic selling approach:

• Initial Block: Transferred 30% of shares to trust for immediate sale
• Milestone Transfers: Remaining shares transferred in three additional blocks over 90 days
• Market Timing: Implementation coincided with quarterly earnings releases
• 10b5-1 Planning: Structured to ensure compliance with insider trading regulations

Phase 3: Investment Implementation (90 Days)

As proceeds entered the trust, the trustee implemented a diversified investment strategy:

• Income Core (40%): Dividend stocks, bonds, and preferred securities
• Growth Component (30%): Globally diversified equity portfolio
• Alternative Investments (15%): REITs, private credit, and infrastructure
• Technology Allocation (10%): Diversified technology sector exposure
• Cash Reserves (5%): Liquidity for distributions and opportunities

Phase 4: Distribution Structure (Ongoing)

Sarah’s distribution plan included several components:

• Base Monthly Income: $16,000 ($192,000 annually)
• Annual Increase: 3% to account for inflation
• Supplemental Distributions: Quarterly for travel and discretionary spending
• Special Purpose Funds: Provisions for healthcare and family support

The Financial Transformation: Before and After

Before DST Implementation

• Asset Allocation: 85% in single tech stock, 15% other investments
• Risk Level: Extremely high concentration risk
• Tax Exposure: Potential $1.07 million immediate tax liability
• Income Generation: Minimal dividend income (approximately $24,000 annually)
• Growth Dependence: Financial future tied to one company’s performance
• Estate Tax Exposure: Significant potential estate tax issues

After DST Implementation

• Asset Allocation: Diversified across 12+ asset classes, no single position exceeding 5%
• Risk Level: Moderate and aligned with retirement objectives
• Tax Exposure: Capital gains taxes deferred and strategically managed
• Income Generation: $192,000 base annual income with 3% annual increases
• Growth Potential: Balanced approach with both income and appreciation
• Estate Planning: Structured for efficient wealth transfer to children

Five-Year Results

Sarah’s DST strategy delivered substantial benefits over the first five years:

Financial Outcomes

• Total Trust Value: Grown to $5.2 million from $4.8 million initial value
• Total Distributions Received: $1.14 million over five years
• Taxes Paid on Distributions: Approximately $234,000 (versus $1.07 million upfront)
• Effective Tax Rate: Average 20.5% on distributions versus 22.3% on immediate sale
• Income Growth: Monthly distributions increased to $18,520 by year five

Market Validation

Sarah’s timing proved fortunate. Within 18 months of implementing her DST strategy, her former company’s stock dropped 48% during a tech sector correction. Had she retained her concentrated position, her $4.8 million would have declined to approximately $2.5 million at the lowest point.

Lifestyle Impact

The DST strategy transformed Sarah’s retirement reality:

• Early Retirement: Successfully retired at 52 as planned
• Travel Freedom: Completed her goal of visiting all seven continents
• Family Support: Provided college assistance for her children
• Peace of Mind: Eliminated anxiety over single-stock volatility
• Purpose Projects: Funded personal interest ventures without financial pressure

Key Success Factors

Several elements contributed to Sarah’s successful outcome:

1. Comprehensive Planning

Rather than focusing solely on tax deferral, Sarah’s team addressed her complete financial picture, including income needs, risk tolerance, and estate planning.

2. Timely Implementation

By acting before the tech sector correction, Sarah avoided significant losses that would have affected her retirement security.

3. Strategic Selling Approach

The phased stock transfer strategy managed market impact and optimized execution prices.

4. Customized Investment Strategy

Rather than a one-size-fits-all approach, Sarah’s investment strategy aligned specifically with her income needs and risk tolerance.

5. Professional Oversight

Working with experienced professionals ensured proper structure, compliance, and ongoing management.

Challenges Navigated

Sarah’s implementation wasn’t without challenges:

Challenge: Emotional Attachment

Having helped build the company from its early stages, Sarah struggled emotionally with selling her entire position.

Solution: Sarah maintained a small personal holding (5% of her original position) outside the DST to maintain a connection while securing the majority of her wealth.

Challenge: Income Calibration

Initially, Sarah underestimated her retirement income needs, creating potential shortfalls.

Solution: The trust structure allowed for quarterly supplemental distributions during the first year until a more accurate monthly amount was established.

Challenge: Market Volatility

Significant market volatility during implementation created execution challenges.

Solution: The phased selling approach and disciplined timing parameters reduced the impact of short-term volatility.

Challenge: Investment FOMO

When her former company’s stock temporarily surged before its eventual decline, Sarah experienced “fear of missing out.”

Solution: Regular performance reviews comparing her diversified portfolio to the single-stock alternative reinforced the wisdom of her risk reduction strategy.

Long-Term Planning Considerations

Sarah’s DST strategy included provisions for evolving needs:

Phase One: Active Retirement (Years 1-10)

• Higher income distributions supporting travel and activities
• More growth-oriented investment allocation
• Maximum flexibility provisions

Phase Two: Lifestyle Adjustment (Years 10-20)

• Moderately reduced activity level with stable income needs
• Increasing focus on healthcare considerations
• Beginning of legacy planning discussions

Phase Three: Legacy Transition (Years 20+)

• Emphasis on wealth transfer efficiency
• Healthcare funding provisions
• Charitable integration components

Lessons for Single-Stock Position Holders

Sarah’s experience offers valuable insights for others facing concentrated stock positions:

1. Prioritize Risk Management

The psychological tendency to focus on potential continued gains often overshadows the very real risks of concentration. Sarah’s willingness to prioritize risk reduction preserved her wealth.

2. Consider the Tax-Adjusted Comparison

When evaluating a DST versus immediate sale, the appropriate comparison isn’t gross values but after-tax results. Sarah’s decision to defer over $1 million in taxes created significant compounding advantages.

3. Develop Clear Income Parameters

Success requires detailed income planning beyond simple annual needs. Sarah’s comprehensive income strategy included base needs, inflation adjustments, and special purpose provisions.

4. Maintain Flexibility

Sarah’s DST structure included adjustment mechanisms that allowed her to adapt to changing circumstances while maintaining tax advantages.

5. Address Emotional Factors

Successful implementation requires acknowledging and planning for the emotional aspects of selling a stock representing career achievement.

Is a DST Right for Your Concentrated Position?

For those considering a similar strategy, these key factors suggest DST suitability:

• Significant Appreciation: Substantial unrealized gains creating material tax concerns
• Income Need: Desire to generate sustainable income from the position
• Risk Concern: Recognition of concentration risk and desire for diversification
• Tax Sensitivity: Preference for tax-efficient transitions versus immediate taxation
• Long-Term Perspective: Willingness to implement a strategy with a multi-year horizon

Concentrated stock positions often represent career achievement and create tremendous opportunity, but they also present significant risks. Sarah’s case demonstrates how a properly structured Deferred Sales Trust can transform this common financial challenge into lifetime financial security while deferring taxes and creating reliable income.

As digital platforms like AcquiDST make DST implementation and management more accessible, converting single-stock positions into diversified, income-generating portfolios has become more streamlined than ever. For executives and employees with concentrated wealth, this approach offers a compelling alternative to conventional diversification strategies.