A prospective client was introduced to Convergent with a $104 million concentrated stock position in a publicly traded company. The cost basis for this position was essentially zero. He and his wife were living off of the quarterly dividend, but realized they needed to diversify the risk associated with a single stock position after being asked the simple question, “how many shares of this stock would you purchase if you were 100% in cash.” Simply put, nobody had boiled the issue down to something so simple.
We structured a variable prepaid forward contract to protect the client’s net worth against a “disaster scenario” of a dramatic stock price decline, while simultaneously diversifying their holdings without significant tax consequences.
Pursuant to the client’s objectives, a structure was identified that was able to limit the downside to a loss of 10%, retain all dividends, and participate in stock appreciation of up to 44.5%. In addition, they were able to take a loan of approximately $73 million using the stock as collateral priced at LIBOR+0. The loan proceeds were invested into a diversified portfolio with substantially less volatility.
During the course of 2009, the value of the stock fell to as low as $43.5 million—a loss of 58%. At the same time, the diversified portfolio lost significantly less than the single stock position. Convergent convinced the client to detach emotionally from the stock that had meant so much to them, structured a transaction to meet their objectives and shopped the transaction to secure favorable pricing and terms, and diversified their portfolio to ensure their lifestyle - an important objective for families of significant wealth.
Wealth Advisory for the very affluent often involves intangibles such as family interaction, charitable planning, and estate planning. For a mature beneficiary of a sizable estate, a client who engaged Convergent in 2007 arrived with a traditional portfolio of US Stocks – including some low basis securities her father had acquired and passed on decades earlier - and municipal bonds. Of primary concern for our new client was the reliance on the trust assets to serve not only her lifestyle needs, but also to serve the needs of adult children who were the ultimate beneficiaries. These conversations took a heavy emotional toll on both our client and the related families.
Early in the relationship, Convergent diversified the family holdings, encouraging our client to both pre-fund the next decade’s charitable planning with the low basis-stock (which happened to be in financial securities) and to further diversify the portfolio. This act alone saved the portfolio from significant losses that may have occurred in the crash of 2008. More importantly, however; in order to insulate our client from the emotional burden of providing for the adult children on an ad hoc basis, Convergent worked with the client’s children to develop budgets and to live within those budgets. Using that calculus as a basis for determining how much money to transfer to the children, a series of Grantor Retained Annuity Trusts (“GRATs”) were established and executed, moving sufficient assets out of the estate to fund the children’s cash flow requirements in a tax efficient manner, while simultaneously assuring our client that they could enjoy their lifestyle without worry.
Millions of dollars were saved through wealth transfer, avoidance of capital gains and related deductions as a result of charitable planning, and – more importantly – the stress that can accompany family wealth was ameliorated.
In 2011, Convergent responded to the uncertainty surrounding the future of the $5 million estate and gift tax exemption and made proactive recommendations for all of our clients. A staple of our offering, our Director of Trusts & Estate Planning reviewed this couples’ estate plan to discuss potential opportunities. As grandparents, the couple had very specific thoughts and goals with respect to establishing their legacy.
Collaborating with their lawyer and accountant, Convergent developed recommendations that maximized the full exemption while retaining flexibility to meet their objectives and; helping the family to achieve some very important personal goals. The expected tax savings resulting from this planning alone should offset Convergent’s fee indefinitely.