Say you’ve decided a large position in a single stock is now a real risk to your retirement. The obvious fix, selling everything at once, can trigger a huge tax bill.
Diversifying is usually still worth it, and you don’t have to sell everything at once to get there. Several tools exist for exactly this problem, and picking the right one is often what separates a plan you actually follow through on from one that sits untouched for years because the tax bill feels too big to face.
Below is the toolkit I walk investors through when they’re sitting on a concentrated position. If you’re in this situation and want help figuring out which of these fits, email me directly at [email protected] with the details and we can discuss. As a fee only fiduciary, I don’t sell any of these products directly, so I have no reason to steer you toward one over another except what works for you. I work with investors across Colorado and nationally.
If you’re still deciding whether selling makes sense at all, our companion article on selling a large stock position before retirement walks through that decision first.
Why Concentrated Stock Is Hard to Diversify
Most people aren’t reluctant to diversify. They’re stuck on the tax math.
When a position has a low cost basis relative to its current value, selling it all in one year can push you into the highest capital gains bracket, trigger the net investment income tax, and in some cases bump your ordinary income tax bracket too. On a multimillion-dollar position with a large embedded gain, that tax bill alone can run into six or seven figures, due the same year you sell.
Every tool below is a way around that problem: getting real diversification without paying the entire bill up front.
Staged Selling: The Simplest Tool, Often Underrated
Spreading a sale over several tax years is a legitimate strategy on its own, not just a fallback for people who don’t qualify for anything fancier.
Selling a portion of the position each year, timed around your income, deductions, and tax bracket thresholds, can meaningfully cut the total tax paid compared to selling everything at once. It works especially well in lower-income years, like a sabbatical, time between jobs, or early retirement before Social Security and required minimum distributions kick in. Pairing staged sales with tax-loss harvesting elsewhere in your portfolio can offset some of the gain along the way.
The catch is time. You’re carrying concentration risk for longer, which only makes sense if the position isn’t so large or volatile that you need to move faster.
Exchange Funds
An exchange fund lets you contribute your concentrated shares into a pooled partnership alongside other investors doing the same thing with their own concentrated positions. In return, you get a proportional interest in a diversified basket built from everyone’s contributions, without triggering a taxable sale.
That tax deferral is real. You keep the full pre-tax value of your position working for you instead of losing a chunk of it to capital gains tax before reinvesting. When you eventually redeem your interest, your original cost basis carries over, so the tax bill doesn’t go away, but it can be pushed off for years.
The catch here is access and time. Most exchange funds want a minimum contribution somewhere between $500,000 and several million dollars, and many only accept accredited investors or qualified purchasers. To keep the tax treatment intact, funds typically hold around 20% of assets in illiquid investments like real estate, and there’s usually a lock-up period of roughly seven years before you can redeem your full diversified interest without a penalty. The fund also has to be willing to take your specific stock when you apply, since concentration limits on any single name can close the door if too many other investors are already contributing shares of the same company.
These tend to fit investors who want meaningful diversification relatively fast, can live with a multi-year lock-up, and meet the qualification bar.
Charitable Remainder Trusts
If you already have philanthropic goals, a charitable remainder trust (CRT) can solve the tax problem and get you closer to those goals at the same time.
You transfer appreciated stock into an irrevocable trust. Because the trust itself is tax exempt, it can sell the stock and reinvest the proceeds into a diversified portfolio without paying capital gains tax on that sale. You get an income stream back, either a fixed dollar amount (a CRAT) or a percentage of the trust’s value recalculated each year (a CRUT), for a set term or for life. You also get an upfront income tax deduction based on the present value of what eventually goes to charity, and the asset comes out of your taxable estate.
Say you’re holding $2 million in stock with a cost basis of $150,000. Selling that outright would mean capital gains tax on close to $1.85 million, easily $400,000 or more once you add in federal, state, and net investment income tax. Put that stock into a CRT instead, and the trust sells it tax free, reinvests the full amount, and pays you an income stream for years, plus you get a real deduction the year you fund it.
The tradeoff is that it’s permanent. Once assets go into a CRT, they’re not coming back out. This fits people who already want to give to charity as part of their plan, not those just looking for a temporary tax deferral with full access to their principal later.
Direct Indexing Through a Separately Managed Account
Instead of holding one stock, a direct indexing SMA has you directly own a broad, diversified basket of individual stocks, often hundreds to well over a thousand names, with active daily tax management layered on top. Our article on tax-aware long/short strategies covers one version of this in depth, including a specific option through Dimensional Fund Advisors, what it costs, and how it stacks up against actively managed long/short overlays.
This doesn’t diversify your existing position directly, since the SMA holds a different basket of stocks rather than absorbing your specific shares. It’s better thought of as part of a broader plan: you sell down the concentrated position in stages while directing new contributions and reinvested proceeds into a tax-managed SMA, letting its ongoing loss harvesting help offset some of the gains you’re generating along the way.
Tax-Aware Long/Short Overlays
This is a more aggressive tool, and it deserves real scrutiny before you use it. A tax-aware long/short strategy uses an actively managed account, often built around your concentrated position, that takes both long and short positions to generate ongoing tax losses while an active manager tries to add value on both sides of the trade.
Done well, this can speed up diversification of a large position while producing losses to offset the gain from selling it. Done poorly, or with a manager who doesn’t actually add value through stock selection, you’re left with extra leverage and complexity and not much tax benefit to show for it. We cover the mechanics, the real risks, and recent custodian restrictions on this strategy in detail in our tax-aware long/short article, including account minimums that changed meaningfully in 2026.
10b5-1 Trading Plans for Insiders
If you’re a corporate insider or hold restricted stock, you often can’t just decide to sell on a given day. A 10b5-1 plan lets you set a trading schedule in advance, while you don’t hold material nonpublic information, and it then executes on its own regardless of what you know later.
This doesn’t lower your tax bill. What it does is give you a compliant way to run a staged diversification plan, fund an exchange fund contribution, or fund a CRT, without tripping over insider trading restrictions or blackout windows every time you want to act.
Gifting and Estate Strategies
If your concentrated position is worth more than you’ll ever spend, gifting shares to family or into trusts can do two things at once: move future appreciation out of your taxable estate, and spread the eventual tax bill across people who may be in lower brackets than you.
For 2026, the annual gift tax exclusion is $19,000 per recipient, or $38,000 for a married couple splitting gifts. You can give that much to as many people as you want each year without touching your lifetime exemption, which sits at $15 million per individual, or $30 million per married couple, after recent tax law changes. Anything above the annual exclusion counts against that lifetime number rather than triggering gift tax right away.
Gifting doesn’t make the embedded gain disappear. Recipients generally inherit your original cost basis, so a future sale on their end still triggers capital gains tax, just hopefully at their lower rate. This one fits people focused on estate and legacy planning as much as their own diversification.
Best Long Term Tools
- A modest gain and a longer timeline points toward staged selling on its own, maybe paired with tax-loss harvesting elsewhere in the portfolio
- Existing charitable goals, a large gain, and a willingness to give up control of the asset points toward a charitable remainder trust
- A preference for full liquidity and control, ongoing tax management, and no interest in betting on a manager’s stock picks points toward direct indexing
- Real conviction in a specific manager’s stock-picking ability, plus a large gain to offset points toward a tax-aware long/short overlay, approached carefully
- Insider status or trading restrictions means a 10b5-1 plan has to be part of whatever else you choose
- More wealth than you’ll spend in your lifetime opens the door to gifting strategies alongside any of the above
Most people end up using two or three of these together, staged over several years rather than executed all at once.
Where This Leaves You
None of these tools work well when picked off a checklist without understanding the tradeoffs: the lock-up on an exchange fund, the permanence of a CRT, the manager risk in a long/short overlay, or the limits of staged selling when a position is simply too large relative to your income.
If you’re sitting on a concentrated position and want to work through which combination fits your numbers, your timeline, and your goals, email me directly at [email protected] with the details, or schedule a conversation. You can also see how I work and what I charge on the services and fees page.
Key Takeaways
- The obstacle to diversifying concentrated stock is almost always the tax bill from selling, not reluctance to diversify
- Staged selling over multiple tax years is a legitimate, simple strategy on its own, especially in lower-income years
- Exchange funds defer capital gains tax by pooling concentrated shares into a diversified partnership, but require meeting investor qualifications and accepting a multi-year lock-up
- Charitable remainder trusts let you sell appreciated stock tax free inside the trust while generating an income stream and an upfront tax deduction, in exchange for giving up control of the asset permanently
- Direct indexing SMAs and tax-aware long/short overlays both use active daily tax management, but only the long/short version depends on a manager successfully picking stocks
- Corporate insiders generally need a 10b5-1 trading plan to execute any of these strategies compliantly
- Most investors combine two or three of these tools over several years rather than choosing just one
About the Author
Gabriel Motta, CFP®, MBA, is the founder and principal of Inclinevest LLC, a fee-only fiduciary retirement financial advisor and financial planner based in Greenwood Village, Colorado. He works with high-net-worth pre-retirees and retirees throughout south Denver, across Colorado, and nationally, including clients in Highlands Ranch, Centennial, Lone Tree, Aurora, Parker, Castle Rock, and Littleton. As a retirement planner and wealth manager, Gabriel helps clients navigate retirement income planning, Social Security strategy, tax-efficient withdrawals, and equity compensation. Gabriel is a NAPFA and XY Planning Network member. Learn more about Gabriel and Inclinevest or schedule a conversation.
This article is for general informational and educational purposes only. It isn’t personalized investment, tax, or legal advice, and it shouldn’t be relied on as a substitute for guidance specific to your situation. Inclinevest LLC is a registered investment adviser. Registration doesn’t imply any level of skill or training. Please consult a qualified professional before making decisions about your own financial circumstances.
