In converting new clients’ investments to low-cost, highly diversified portfolios, we usually need to liquidate some or all of the clients’ existing assets, which often times results in realization of capital gains. In plain English, sometimes setting up a new account leads to a big tax bill.
While tax minimization is an important goal in the financial planning process, sometimes the benefit of selling outweighs the tax burden. This is particularly true when a relatively young client has a large portion of their portfolio in just a few, or maybe just one, investment, like stock from a company that employed him for many years. When a large drop in stock price could wipe out a portfolio, we may advise against holding the stock solely to avoid taxes.
On the other hand, some times, a hold strategy may be worth the risk. One example could be an elderly client with a large enough estate that it is unlikely she will ever need to sell any of the stock for cash flow. In that case we might suggest holding the stock for the rest of her life, and when the asset passes on to her heirs, they will get to “step up” the cost basis. In plain English, the taxes will never have to be paid.
As with other areas of financial planning, the strategy will be tailored to the individual client’s circumstances.