Portfolio simplication and what to do about unrealized cap gains?

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dave1054
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Portfolio simplication and what to do about unrealized cap gains?

Post by dave1054 »

I am in early retirement and very comfortable financially. I want to simplify my portfolio to make my life less complicated plus make it easier for the wife if I predecease her. I have most of my holdings in total stock market, dividend growth fund, mid cap index, and international dividend appreciation with smattering of a few stocks and emerging markets. All my bonds are short and intermediate muni mutual funds.
Allocation is about 55%stocks/45%bonds.
I would love to have it all in one or two funds such as Wellington or Vanguard Balanced Index. My problem if you want to call it that is my unrealized cap gains of investing for 40 odd years adding up to about $4 million.

So how do I simplify my portfolio without incurring a massive tax bill?
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retired@50
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by retired@50 »

I guess you handle this task like eating an elephant... One bite at a time.

I'd personally focus on selling the individual stocks, since they are riskier than index funds. Decide what amount of capital gain you're willing to incur each year and get to work. You can also stop re-investing dividends in the funds you don't really want to own. Direct any unneeded dividends or capital gains distributions toward funds you seek to hold long term.

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BL
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by BL »

Take a look at the funds to see which produced taxable dividends, especially those that are not qualified, and distributed Capital Gains (not from your selling them). These are not ideal in a taxable account due to taxes on distributions whether you need the money or not. Selling a bit of your funds as needed is usually more tax efficient than high dividends.

There is the same problem with having W/Wellington as above. A solution could be holding just Total Stock Market (no capital gains so far and mostly qualified dividends) and Muni Bonds, and maybe Total International Stock Fund. There is also one balanced fund that you might like: Vanguard Tax-Managed Balanced Fund.

Agree that single stocks certainly don't simplify the portfolio, and could introduce extra risk especially if you have over 5% of your portfolio in a single stock.
Last edited by BL on Sun Mar 28, 2021 1:23 am, edited 1 time in total.
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camillus
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by camillus »

If you are charitably inclined, you could use a Donor Advised Fund to gift multiple years of gifts and generate tax deductions which may help you pay for other capital gains.
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jimkinny
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by jimkinny »

I would likely get rid at opportune times (like 2008 and March 2020) of the few stocks and emerging markets and just keep the rest. If you have everything at Vanguard you could talk to your wife about there personal advisor service. Let the PAS handle things if your wife doesn't want to be involved.
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by dcabler »

jimkinny wrote: Sun Mar 28, 2021 6:34 am I would likely get rid at opportune times (like 2008 and March 2020) of the few stocks and emerging markets and just keep the rest. If you have everything at Vanguard you could talk to your wife about there personal advisor service. Let the PAS handle things if your wife doesn't want to be involved.
In March/April of 2020 I completed the cleanup of my portfolio.
- I had already done what I could earlier in our rollover IRA's and in my 401K
- After that, in my taxable account, I started the process of slowly turning the oil tanker around by redirecting dividends/cap gains thrown off by my undesireable funds into where I ultimately wanted to be.
- I sold any shares of anything undesireable that was under water and matched the amount of anything that was above water for zero net gain. I monitored all shares all the time and looked for such opportunities. Then in March 2020 the opportunity was big enough to complete the process.

That just got me into the AA I want to be in. In my IPS I outline exactly how to manage what's left, but I still get the somewhat blank look from DW when I explain it. So included in my IPS are a list of possible suggestions for external management should I predecease her.

Cheers.
HomeStretch
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by HomeStretch »

Are the $4 million in unrealized capital gains in a Taxable account? Any capital gains in a tax deferred or Roth account should not be of concern.

You received some good suggestions on how to clean-up a Taxable account. But reconsider whether you want to invest in a balanced fund or Wellington in a Taxable account as they are likely less tax efficient. A two or three-fund portfolio can be simple and tax efficient.
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dave1054
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by dave1054 »

Homestretch, yes the unrealized gains are in a taxable account.
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dave1054
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by dave1054 »

Dcabler, hope you can elaborate on your statement:


In my IPS I outline exactly how to manage what's left, but I still get the somewhat blank look from DW when I explain it. So included in my IPS are a list of possible suggestions for external management should I predecease her.

What external management for DW?
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dave1054
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by dave1054 »

I guess we will have to go with Vanguard PAS when I pass on, but I HATE their fee structure. Why should a 5 million portfolio pay about $15000 per year and 500000 portfolio pay about $1500 for very similar investment of time by Vanguard.

I guess I can’t manage it from the grave 🤔
HomeStretch
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by HomeStretch »

dave1054 wrote: Sun Mar 28, 2021 7:10 am Homestretch, yes the unrealized gains are in a taxable account.
Sounds like your $5 million portfolio is held mostly/completely in a Taxable account so you have to hold most/all of your 40%(?) fixed income allocation in your Taxable account. If yes and you decide to go the one-fund route, Vanguard has a tax-managed balanced fund (VTMFX) that might be more tax efficient for you than VBIAX, depending on your marginal tax rate.
livesoft
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by livesoft »

When you or your spouse die, what will be the effect of the step-up basis for your taxable assets? In the community property state of Texas all jointly held assets get a 100% step-up basis and the unrealized cap gains problem goes away. So a plan for what to sell/exchange at that time should be written and discussed. If you have children or other heirs, then this written plan should be discussed with them as well as the executor of your estate.
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Grt2bOutdoors
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by Grt2bOutdoors »

What tax bracket are you in today? Have you been slowly liquidating your portfolio? Perhaps start selling the individual equities?
Last edited by Grt2bOutdoors on Sun Mar 28, 2021 7:42 am, edited 1 time in total.
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by mgensler »

dave1054 wrote: Sun Mar 28, 2021 7:18 am I guess we will have to go with Vanguard PAS when I pass on, but I HATE their fee structure. Why should a 5 million portfolio pay about $15000 per year and 500000 portfolio pay about $1500 for very similar investment of time by Vanguard.

I guess I can’t manage it from the grave 🤔
You could do a lot worse than Vanguard PAS. However, once you have the three fund setup, there is not really anything to manage. I told my spouse it was fine if they never rebalanced. They were visibly relieved.
livesoft
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by livesoft »

Furthermore, make sure your heirs know that they should not keep any of the individual stocks that you might have left for sentimental reasons. Make sure they know to sell them and buy tax-efficient index funds or do something useful with your money.
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Grt2bOutdoors
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by Grt2bOutdoors »

dave1054 wrote: Sun Mar 28, 2021 7:18 am I guess we will have to go with Vanguard PAS when I pass on, but I HATE their fee structure. Why should a 5 million portfolio pay about $15000 per year and 500000 portfolio pay about $1500 for very similar investment of time by Vanguard.

I guess I can’t manage it from the grave 🤔
And do you think it’s much different elsewhere? You can get bells and whistles along with a much higher fee to go with it and zero assurance that you will generate a higher return, you could do worse.
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midareff
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by midareff »

dave1054 wrote: Sat Mar 27, 2021 9:35 pm I am in early retirement and very comfortable financially. I want to simplify my portfolio to make my life less complicated plus make it easier for the wife if I predecease her. I have most of my holdings in total stock market, dividend growth fund, mid cap index, and international dividend appreciation with smattering of a few stocks and emerging markets. All my bonds are short and intermediate muni mutual funds.
Allocation is about 55%stocks/45%bonds.
I would love to have it all in one or two funds such as Wellington or Vanguard Balanced Index. My problem if you want to call it that is my unrealized cap gains of investing for 40 odd years adding up to about $4 million.

So how do I simplify my portfolio without incurring a massive tax bill?
I'm under the impression that when your wife inherits the portfolio she does it at step up basis. That would seem to be the time to do the transaction to transform everything into simplicity. .. according to your detailed instructions. If that's not correct I'm sure someone better versed in tax law will chime in.
Topic Author
dave1054
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by dave1054 »

livesoft wrote: Sun Mar 28, 2021 7:40 am When you or your spouse die, what will be the effect of the step-up basis for your taxable assets? In the community property state of Texas all jointly held assets get a 100% step-up basis and the unrealized cap gains problem goes away. So a plan for what to sell/exchange at that time should be written and discussed. If you have children or other heirs, then this written plan should be discussed with them as well as the executor of your estate.
Excellent points, livesoft. I am curious of the process of the step up basis. We have a joint account with Vanguard. Does Vanguard automatically provide the step up basis upon death of the first spouse?
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by livesoft »

dave1054 wrote: Sun Mar 28, 2021 1:22 pmExcellent points, livesoft. I am curious of the process of the step up basis. We have a joint account with Vanguard. Does Vanguard automatically provide the step up basis upon death of the first spouse?
I don't know what Vanguard does, but I doubt it is automatic since Vanguard doesn't keep track of death.
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Topic Author
dave1054
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by dave1054 »

midareff wrote: Sun Mar 28, 2021 8:02 am
dave1054 wrote: Sat Mar 27, 2021 9:35 pm I am in early retirement and very comfortable financially. I want to simplify my portfolio to make my life less complicated plus make it easier for the wife if I predecease her. I have most of my holdings in total stock market, dividend growth fund, mid cap index, and international dividend appreciation with smattering of a few stocks and emerging markets. All my bonds are short and intermediate muni mutual funds.
Allocation is about 55%stocks/45%bonds.
I would love to have it all in one or two funds such as Wellington or Vanguard Balanced Index. My problem if you want to call it that is my unrealized cap gains of investing for 40 odd years adding up to about $4 million.

So how do I simplify my portfolio without incurring a massive tax bill?
I'm under the impression that when your wife inherits the portfolio she does it at step up basis. That would seem to be the time to do the transaction to transform everything into simplicity. .. according to your detailed instructions. If that's not correct I'm sure someone better versed in tax law will chime in.
Excellent points midareff. I guess the best time to move to a more simplistic portfolio is after my demise which kind of defeats the purpose of making things easier for her. I wonder if PAS will provide her with this type of advice.
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Re: Portfolio simplication and what to do about unrealized cap gains?

Post by livesoft »

BTW, State law determines step-up basis in that for some states only half of the shares get a step-up basis and not all the shares that some other state allow. I don't know how "the half" is determine either. I haven't looked into it since my state gives 100% of shared assets the step up.
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