Mariner Wealth Advisors usually favors selling stock in stages over an exchange fund, which only defers the tax, locks shares up about seven years and often requires $5 million in investments. For hypothetical Sofia's $700,000 of shares with a $90,000 basis, a full sale costs an assumed $122,000 of federal tax. That is about 17% of the position, so any drop larger than 17% would cost her more than the tax.
We wrote this for executives and retired executives who hold low-basis company shares, have heard about exchange funds and are wondering whether to wait for one. If your investments are far above $5 million and the stock is only a minor part of your net worth, you can skip ahead to the section on pros and cons. The Mariner Wealth Advisors team compares structures here, not specific funds.
The mistake: treating a tax deferral as a tax saving
Investors hear "no tax at contribution" and assume the gain disappears. It doesn't. The basket you get at redemption keeps your original cost basis, so the same gain comes due when you sell those shares.
Now put a price on waiting. If Sofia's $700,000 of stock fell 30%, she would lose $210,000. That is more than the $122,000 a full sale would cost her, using our illustrative 20% federal rate.
The second error is quieter: holding the single stock for months while you wait for a fund to open or close a raise. Those months aren't free. You carry the full risk of one company the whole time.
Investing involves risk, including loss of principal, and the 30% drop is an illustration, not a forecast.
How does an exchange fund actually work?
An exchange fund is a partnership where several investors contribute low-basis stock, and contributing to a qualifying fund generally triggers no capital gain. The fund must hold at least 20% in qualifying illiquid assets, such as real estate. After about seven years you can redeem for a basket of the fund's stocks.
The basket keeps the cost basis of the stock you put in. You get a real deferral, but the gain hasn't gone anywhere.
Leaving early usually means getting your own contributed shares back, not the diversified basket. You'd be back in the concentrated position, minus the time and fees.
Funds also charge annual fees, so ask for them in writing. For illustration, 1% a year on $700,000 is $7,000, about $49,000 over seven years before growth.
One more point. The basket reflects whatever other investors contributed. It is diversified, but nobody chose it for your portfolio.
Hypothetical: Sofia's shares after her NUA distribution
Sofia is 63, widowed and a recently retired COO of a regional insurer, with no plans to work again. She has already taken her net unrealized appreciation distribution, so $700,000 of former employer stock with a $90,000 basis now sits in a taxable account. (The NUA decision itself has its own page; here we start after it.)
Her gain is $700,000 minus $90,000, or $610,000. At an assumed 20% federal long-term rate, a full sale costs $610,000 × 0.20 = $122,000. If she sells half this year and half next year, each sale costs $61,000 at that same 20%.
An exchange fund costs $0 now but defers the full $122,000, locks the money up until she is about 70, and often requires $5,000,000 in investments. She has about $2,600,000.
Giving $70,000 of shares to charity removes $61,000 of gain, since $70,000 is 70/700 of the position and carries $9,000 of basis. Selling the remaining $630,000 then realizes a gain of $549,000, and $549,000 × 0.20 = $109,800. That saves $12,200 against the full sale.
Look at the table for what stands out. Only the exchange fund row has a seven-year lockup and an eligibility bar, and the gift row is the only one that removes tax for good.
Before Mariner Wealth Advisors suggests a sale, it works out the federal tax on each route and compares it with the size of a single-stock drop.
| Route | Federal tax due now | Lockup and eligibility | Diversification achieved |
|---|---|---|---|
| Sell all this year | $122,000 | None; anyone | All $578,000 after tax |
| Sell half per year | $61,000 each year | None; anyone | Half now, half next year |
| Exchange fund | $0 ($122,000 deferred) | About 7 years; often $5M | Basket after about 7 years |
| Give $70,000, sell rest | $109,800 | None; anyone | $630,000 sold, $70,000 to charity |
| Hold everything | $0 | None | None; one stock |
Who qualifies for an exchange fund, and who doesn't?
Exchange funds are often offered privately, and only to qualified purchasers. For an individual, that usually means owning $5 million or more in investments. Each fund also sets its own minimum contribution. Below that line, most of these funds won't take you.
Sofia's total investments of about $2,600,000 put her below that bar for many funds. Her route is a sale or a gift.
Some funds won't accept certain stocks, for example if the fund already holds too much of that sector or company. Eligibility is decided by the fund, not the investor.
Restricted or recently acquired shares may need extra review before any fund will take them. Ask the fund sponsor directly.
Does the answer change with age or account size?
Yes. A seven-year lockup started at 63 ends at 70; started at 45, it ends at 52. The shorter your horizon for spending the money, the worse an illiquid wrapper fits, and the larger your portfolio relative to the stock, the easier a lockup is to carry.
On size: if the stock is 10% of a $10 million portfolio, a lockup is less painful. If it is a quarter or more of investments under $5 million, liquidity matters more and eligibility is often missing.
The estate angle is the main argument for long deferral. Appreciated stock held until death generally receives a step-up in basis. But the NUA portion of shares distributed from a 401(k) does not get that step-up, which weakens the case for Sofia.
Income matters too. A retired executive with low other income may be able to stage sales across tax years and keep more of the gain in lower long-term brackets. Check the current IRS thresholds.
Exchange fund, staged sale or gift: pros and cons
Each route buys something and costs something.
We would rather pay $61,000 this year and next than hold $700,000 in one stock until 70, because the tax is known and the drop is not.
Exchange funds can make sense for an investor with well over $5,000,000 in investments, a long horizon, a position that is a modest share of wealth and no need for the cash. Fund terms, fees and accepted stocks vary, so this page compares structures, not specific funds.
- Exchange fund, pros: no tax at contribution and broad diversification after the lockup.
- Exchange fund, cons: about seven years locked, an eligibility bar, annual fees, a basket you didn't choose, and the gain is still owed later.
- Staged sale, pros: available to anyone, diversification starts this year, and gains can be spread across tax years.
- Staged sale, cons: tax is paid now, and shares not yet sold stay exposed until they are.
- Charitable gift, pros: a deduction at fair market value for shares held more than a year, subject to income limits, and no tax on the donated gain.
- Charitable gift, cons: the money leaves your balance sheet, so it only fits giving you'd do anyway.
How to decide, step by step, and mistakes to avoid
The decision rule: if a single-stock drop larger than your full-sale tax percentage is plausible during a seven-year lockup, deferral doesn't win on risk. For one stock, it usually is plausible. Without about $5,000,000 in investments, or with a need for the money within seven years, an exchange fund is generally off the table.
Three mistakes cost real money. Signing fund documents before knowing your redemption terms can leave you with your own concentrated shares if you need cash early.
Ignoring state tax is the second: some states tax capital gains as income, so check your state's rules before you compare routes.
The third is donating cash while holding low-basis stock. Giving the shares avoids tax on the gain, worth $12,200 on Sofia's $70,000 gift at the assumed rate.
- List value, basis and holding period for each lot.
- Compute the tax on a full sale and divide it by the position's value (Sofia: 17%).
- Confirm eligibility in writing before spending time on a fund.
- Compare fees over seven years with the tax deferred.
- Decide what share goes to giving, sale and any fund.
- Set sale dates.
What should you do this week? A checklist and questions
Start with three small tasks, then run the checklist. The questions at the end are the ones worth taking to any advisor.
Mariner Wealth Advisors works with clients nationwide by video and phone. Send the request form with your basis report attached, and an advisor will compare the routes for your shares. Our concentrated stock planning and tax-efficient investing work covers this kind of decision.
- This week: get a cost-basis report from your custodian, write down total investments to test the $5,000,000 bar, and list any giving planned for the next two years.
- Checklist: tax on a full sale as a percentage of the position; years until you'll need the money; lockup end date at your age; fee per year in dollars; what happens if you leave early.
- Ask: What is my after-tax amount under each route?
- Ask: How would you stage a sale across tax years?
- Ask: What does the fund charge each year and on exit?
- Ask: How is a donation of these specific shares deducted?
What people ask about exchange fund vs. selling stock
Can I get out of an exchange fund before seven years?
What fees do exchange funds usually charge?
Does an exchange fund eliminate capital gains tax?
What happens to exchange fund units when the owner dies?
Is a donor-advised fund a better home for low-basis stock than an exchange fund?
Can I contribute only part of my position to an exchange fund?
Primary sources
This content is general information and education. It is not individual investment, tax or legal advice. Investing involves risk, including the possible loss of principal. Before making any financial decision about your equity awards or assets, consult a professional adviser who knows your full situation.