Concentrated Stock Positions in 2026 — The Playbook

A concentrated single-stock position — inherited, founder-earned, or the residue of a private-equity exit that never got trimmed — is the most common tax problem we see land on the desk after a good decade in the market. The position is up, sometimes ten or twenty times basis. Selling means writing a check between 20% and 37% of the appreciation federally, plus 13.3% California, plus 3.8% net investment income tax. And the client, understandably, does not want to write that check.

The code offers real tools for staged diversification without triggering the whole gain in a single year. Most of them are structural, take years to unwind, and have technical traps that turn a clean plan into an unfavorable outcome if a document is drafted wrong. Here is the framework we use.

Start with the math, not the tactic

Before any structure gets built, we run three numbers.

• Combined marginal rate at sale. For a California resident holding long-term, that is 20% federal capital gains plus 3.8% NIIT plus 13.3% California — roughly 37% of the gain. For short-term holdings or ordinary-income dispositions, the number climbs above 50%.
• Step-up cost of holding to death. Under § 1014, heirs take a fair market value basis at date of death. With the OBBBA-permanent estate exemption at $15M per individual ($30M per couple), a large share of concentrated positions fits inside the exemption entirely — meaning the position can pass to heirs with zero income tax on the built-in gain and zero estate tax on the value. For a client under the exemption cap, holding is often the highest-return "strategy" available.
• Position size relative to net worth. A single stock at 60% of liquid net worth is a different problem than the same stock at 15%. The math is the same; the client's tolerance for a single-company drawdown is not.

Half the concentrated-position work we get called in on is a solution looking for the wrong problem — a client insisting on an exchange fund when a partial CRT contribution would have been cleaner, or a family running a 10b5-1 sell-down when the position was already inside the estate exemption and could have passed at stepped-up basis.

Exchange funds — real diversification, real lockup

An exchange fund is a private partnership organized under Subchapter K that pools contributed appreciated stock from multiple investors, diversifies across the pool, and — under § 721 — treats the contribution as a nontaxable exchange for a partnership interest. After a multi-year hold (industry convention is seven years, structured around § 721 investor-diversification requirements), the investor can redeem in kind and receive a diversified basket rather than cash. Original basis carries over — the gain is deferred, not eliminated.

Where it goes wrong. Three places.

1. Qualified-fund rules under § 721(b). The partnership must not be an "investment company" as defined, which means at least 20% of assets in nonpublicly-traded qualifying assets — usually real estate. That is why exchange funds are structured as hybrids. A fund that fails the § 721(b) test is a fully taxable exchange on day one.
2. Liquidity mismatch. The lock is real. A client who needs cash before the hold ends cannot get out cleanly. Redemption in kind is stock, not cash, and selling that stock triggers gain on the original basis.
3. Contribution restrictions. Most managers require single positions of substantial size (often $500K minimum per name), publicly traded, and free of trading restrictions. Private company stock, restricted stock, and 10b5-1 plan positions are typically ineligible.

The client for whom this works is a long-holder with a decade-plus horizon, no near-term liquidity need, and a position large enough to clear manager minimums.

Collars — hedge the position without selling it

A protective collar is a synthetic hedge: buy a put at or below the current market price, sell a call at or above it, and the two premiums roughly offset. The position is protected against a downside break through the put strike and capped on the upside at the call strike. No sale, no gain recognition.

The tax trap is § 1259, the constructive sale rules. A collar built too tight — a put and call struck close enough together that the position is functionally sold — is treated as a constructive sale under § 1259(c)(1), which means the gain is recognized as if the position had been liquidated. The IRS has not issued bright-line guidance on the exact spread that avoids constructive-sale treatment, so practitioners typically target meaningful daylight between strikes and a reasonable term. Facts and circumstances.

Collars are a bridge, not a plan. They protect a position while other machinery — an exchange fund contribution, a CRT funding, an installment sale to a trust — is being set up. They do not solve the underlying gain, and option premiums generate their own short-term tax character on unwind.

Charitable remainder trusts vs. donor-advised funds

For charitably inclined clients, giving appreciated stock is the cleanest single move in the code. A donor-advised fund takes the stock, sells it inside the fund with no capital-gains tax, and the donor takes a fair-market-value deduction under § 170 subject to the 30% AGI ceiling for public-charity gifts of appreciated capital-gain property.

A charitable remainder trust is the more interesting instrument for a concentrated position. Under § 664, the client contributes stock to the trust, the trust sells it tax-free, and the client (or another named beneficiary) receives an annuity or unitrust payment for a term of years or life. The remainder passes to charity. The client gets a partial income tax deduction at funding, avoids the full capital-gains hit on the sale inside the trust, and gets an income stream. For a client sitting on a $5M position with a $500K basis, a CRT converts an all-or-nothing sell decision into a diversified, tax-deferred income stream with a real charitable remainder at the end.

The tradeoffs are irrevocability, the required 10% remainder-value test under § 664(d)(1)(D), and the four-tier income character rules — which distribute ordinary income first, then capital gain, then tax-exempt income, then corpus. Structure matters.

The OBBBA-permanent exemption changed the death-basis calculus

For years, concentrated-position advice at the higher end assumed the estate exemption would revert. OBBBA locked the exemption at $15M per individual, indexed. That changes the math.

For a client whose full concentrated position — plus other assets — fits inside the couple's combined $30M exemption, the § 1014 step-up at death is the highest-return strategy in the code. Every dollar of embedded gain that would have been taxed on a lifetime sale disappears at death. Heirs sell at the new basis with no gain.

For clients above the exemption, the calculus is a blend. The estate-tax cost of holding is real, but the income-tax step-up on the portion inside the exemption is still a durable benefit. Multi-generational structuring — dynasty trusts, generation-skipping transfers, staged gifting — becomes a way to pass a large concentrated position across generations while capturing partial basis step-up along the way.

The permanent exemption also makes GRATs and installment sales to grantor trusts more attractive as a way to freeze estate value while retaining income-tax basis inside the estate.

The founders' overlap — QSBS is a separate universe

For clients whose concentrated position is early-stage C-corporation stock, Section 1202 qualified small business stock is a separate and often better path than any of the tools above. The five-year hold, the $10M-or-10x-basis per-issuer exclusion, and the ability to stack exclusions across trusts and family members can eliminate federal gain on a substantial portion of a founder position entirely.

We cover the QSBS mechanics in depth in our founder's guide to Section 1202. If your concentrated position started as founder stock in a C-corp, that framework applies before any of the exchange-fund or collar analysis on this page.

What we're doing for concentrated-position clients

Every client with a single position representing more than 25% of investable net worth gets the same starting analysis:

• Basis and gain calculation, disaggregated by lot
• Estate exemption fit test — where does the position sit relative to the couple's combined $30M
• Combined marginal-rate calculation at current California residency
• A five- and ten-year scenario grid showing hold, staged sale, exchange fund, and CRT outcomes

The output is a single page that lets the client see the actual tradeoffs — not a pitch for any particular structure. Some clients end up in exchange funds. Some do CRTs. Some hold and pass at stepped-up basis. Some do a combination staged over several years. The right answer depends on charitable intent, liquidity needs, estate size, and tolerance for lockups.

Concentrated positions are the kind of decision where "we'll figure it out later" costs the most. The tools work, but they take months to set up and years to unwind. If you're sitting on a single position that's grown into a real percentage of your net worth, that's a conversation worth having.

David Meyer, CPA is a Partner at Laléa & Black and leads the firm's tax strategy practice for HNW individuals, closely held businesses, and founders working through concentrated-position and QSBS planning.