Elderly Parent's Private Company Stock - Sell or Keep?

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gnr
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Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

Hello,

My mother is in a nice long term care facility and I am managing her finances. She only has Social Security and her savings to pay for her expenses. Most of her assets are liquid (checking/money market/cds) and her remaining funds will be eaten up by the LTC facility over the next 4-5 years. She is in her early 90s with significant health issues as you might expect at that age. However, she has proven time and time again that she is a tough old bird so I need to make sure to make her money last as long as possible before having to move her to a Medicaid facility.

She also has some private company stock from a previous employer (local bank) which makes up less than 10% of her total assets. The stock does pay dividends which is about 3-4 times more than the amount of interest that would be paid if I sold the stock and put the money in a money market account. Since she is in the spend-down portion of her life, I don't want risk losing any of her assets by keeping the stock. However, I would prefer to keep the stock for now because of the dividends and then sell the stock in a few years when her other money is gone. Obviously, this only makes sense if the stock price is the same or higher at the time of sale. If this was a publicly traded stock, I likely wouldn't even consider keeping it. But, since this is a private company stock that she has held for 40+ years, it somehow feels more secure.

The other part of the equation is determining the value of the stock. The market value is only about 2/3 of the book value of the stock. (I contacted someone at the company and they told me what the most recent transactions were to obtain the market value. The company financial statement indicates the book value.) If the company were to sell, I would likely be able to get closer to the book value but that seems unlikely.

I am not aware of any way to really research to know if the value of the stock is stable enough to keep for a few more years before selling. The most recent financial statement shows a profit but I don't really have the knowledge to be able read and understand everything in a financial statement. I would appreciate your thoughts and suggestions.

Thank you
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arcticpineapplecorp.
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by arcticpineapplecorp. »

gnr wrote: Fri May 20, 2022 12:24 pm If this was a publicly traded stock, I likely wouldn't even consider keeping it. But, since this is a private company stock that she has held for 40+ years, it somehow feels more secure.

The other part of the equation is determining the value of the stock. The market value is only about 2/3 of the book value of the stock. (I contacted someone at the company and they told me what the most recent transactions were to obtain the market value. The company financial statement indicates the book value.) If the company were to sell, I would likely be able to get closer to the book value but that seems unlikely.

I am not aware of any way to really research to know if the value of the stock is stable enough to keep for a few more years before selling. The most recent financial statement shows a profit but I don't really have the knowledge to be able read and understand everything in a financial statement. I would appreciate your thoughts and suggestions.

Thank you
are you sure you can sell it whenever you need? private stock is not like publicly traded in that it's more illiquid and less frequently traded, so I wouldn't hold it if I needed money and couldn't get to it.

you could have someone do an independent review of the financials and what the per share value is believed to be. you'll pay for that evalutation obviously.
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delamer
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by delamer »

I know nothing about selling private stock, but why not sell some now and some later?
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ivgrivchuck
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by ivgrivchuck »

Selling private stocks is difficult. Sometimes companies don't allow it w/o their permission.

I would try to contact someone from the company's finance department to find out about the rules and if there is a recent independent appraisal for the company stock.

They might also give helpful tips about the best way to do sale.

No reason to delay the sale if you can get a fair price today.
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123
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by 123 »

I've followed the fortunes of a couple of small banks in Southern California over the years. While each bank, and market they operate in, is different there are certain common risks. For many years the banks operated year after year, profits came in annually, and everyone was happy. One bank went under because they concentrated lending to home loans which they held themselves and suffered steep loses when the housing market dropped and borrowers simply walked away from properties because they were under water. Another bank got too tied up with business to a particular commercial customer. The customer borrowed more and more (at high rates) and became over-extended. The customer declared bankruptcy and brought the bank down with it. Of course in each case deposit account holders lost no funds and the banks were simply absorbed into other banks. There was no equity left so the stockholders got nothing.

Small banks (including those with multiple branches) are risky because they often can't diversify their risks and they become victims of economic conditions. Business can be good until it isn't. Often there is little warning. I'd suggest the shares be sold.
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ResearchMed
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by ResearchMed »

gnr wrote: Fri May 20, 2022 12:24 pm so I need to make sure to make her money last as long as possible before having to move her to a Medicaid facility.
Before even getting into the other issues, if she still has money (and it sounds like she does), then can you find a different, and also *nice*, facility that will KEEP her when/if she runs out of money, and then just collect the Medicaid payment?
Needless to say, they don't take paupers in from the start. But often, if someone has enough for "a while", then they'll consider age, health, and total assets at the time as to whether they'll accept them under those conditions.

(And then also, don't forget about no gifting, etc. within 5 years of wanting/needing Medicaid.)

MIL was in a very nice facility, first Assisted, and then finally Skilled Nursing. That latter was $20k/month without extras (there weren't many extras, but my point is that cost didn't include something like a private duty nurse sitting at her side or such).

She was getting near running out of money, and they had started working with us to complete the Medicaid paperwork.
Alas, she passed about 5 weeks short of her 100th.

DH and I plan to go to the same facility, which we learned about from the inside out while she was there for some years.

The difference between the nicer facilities and Medicaid..................

Good luck!

RM
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

arcticpineapplecorp. wrote: Fri May 20, 2022 1:59 pm
are you sure you can sell it whenever you need? private stock is not like publicly traded in that it's more illiquid and less frequently traded, so I wouldn't hold it if I needed money and couldn't get to it.

you could have someone do an independent review of the financials and what the per share value is believed to be. you'll pay for that evalutation obviously.
Yes, I have communicated with the company president who worked with my mother for a long time. He offered to reach out to some of the individuals who recently had transactions to see if they were interested. She doesn't need the money right now. As long as her health conditions don't change, she won't need it for about 4 years or so when her piggy bank dries up.

I'd rather not have to pay for an evaluation unless the amount was negligible but that isn't likely the case.
delamer wrote: Fri May 20, 2022 2:07 pm I know nothing about selling private stock, but why not sell some now and some later?
It isn't a huge amount and I would rather just get it done once than to have to deal with it twice. It sounds like selling company stock is a bit of a hassle.
ivgrivchuck wrote: Fri May 20, 2022 2:11 pm Selling private stocks is difficult. Sometimes companies don't allow it w/o their permission.

I would try to contact someone from the company's finance department to find out about the rules and if there is a recent independent appraisal for the company stock.

They might also give helpful tips about the best way to do sale.

No reason to delay the sale if you can get a fair price today.
I did contact the company president and he said he could try to locate a buyer. I would then sell to the buyer and they would reissue the stock. I didn't ask about an independent appraisal. Is that something that is done on a routine basis? I also don't want to offend anyone by asking. It feels awkward asking those types of questions to the only person who can really help you sell the stock.

Part of my dilemma is knowing what a fair price is.
123 wrote: Fri May 20, 2022 3:03 pm I've followed the fortunes of a couple of small banks in Southern California over the years. While each bank, and market they operate in, is different there are certain common risks. For many years the banks operated year after year, profits came in annually, and everyone was happy. One bank went under because they concentrated lending to home loans which they held themselves and suffered steep loses when the housing market dropped and borrowers simply walked away from properties because they were under water. Another bank got too tied up with business to a particular commercial customer. The customer borrowed more and more (at high rates) and became over-extended. The customer declared bankruptcy and brought the bank down with it. Of course in each case deposit account holders lost no funds and the banks were simply absorbed into other banks. There was no equity left so the stockholders got nothing.

Small banks (including those with multiple branches) are risky because they often can't diversify their risks and they become victims of economic conditions. Business can be good until it isn't. Often there is little warning. I'd suggest the shares be sold.
Thanks for the example story. This particular bank has closed a couple of their branches in recent years. You are probably right, that I should go ahead and sell the shares and not worry about the extra lost dividends and potential increase in stock value. After reading all of the posts so far, it seems like that might be my best option as long as I can feel good about the market price.
ResearchMed wrote: Fri May 20, 2022 3:10 pm
gnr wrote: Fri May 20, 2022 12:24 pm so I need to make sure to make her money last as long as possible before having to move her to a Medicaid facility.
Before even getting into the other issues, if she still has money (and it sounds like she does), then can you find a different, and also *nice*, facility that will KEEP her when/if she runs out of money, and then just collect the Medicaid payment?
Needless to say, they don't take paupers in from the start. But often, if someone has enough for "a while", then they'll consider age, health, and total assets at the time as to whether they'll accept them under those conditions.

(And then also, don't forget about no gifting, etc. within 5 years of wanting/needing Medicaid.)

MIL was in a very nice facility, first Assisted, and then finally Skilled Nursing. That latter was $20k/month without extras (there weren't many extras, but my point is that cost didn't include something like a private duty nurse sitting at her side or such).

She was getting near running out of money, and they had started working with us to complete the Medicaid paperwork.
Alas, she passed about 5 weeks short of her 100th.

DH and I plan to go to the same facility, which we learned about from the inside out while she was there for some years.

The difference between the nicer facilities and Medicaid..................

Good luck!

RM
Sorry for you loss of your MIL. It's a shame she got that close to 100 but didn't quite make it.

We toured many facilities and feel lucky to have found the one she is in. The facility is assisted living/memory care which narrows down the options. The one she is in is close for my family to visit often and we like the staff. I am sure we could locate one as you suggest that would accept Medicaid, but it likely won't be as nice and it certainly won't be as close. They do have another facility under the same corporate umbrella that is close by and it is an actual skilled nursing home that does have some Medicaid beds. They currently have marginal reviews due to staffing shortages, but we are hoping that will improve by the time my mother is out of money. Since they are related, I think the two facilities work together in situations like this to make sure a bed is available. We have a couple of years before we have to go down that road if we make it that far.

Yes, I am aware of the gifting rules (somewhat anyway). Our goal is not to get her on Medicaid by moving money, but rather just want her money to last as long as possible.

My estimate of 4-5 years of money is as things are now and don't include adding extra nurses, etc. If she were to need 20K per month, the tank will empty in no time. I know of another close relative where that has happened. It's just a shame you work all your life, and the money is spent at the end like this.

Yes, I know the Medicaid facilities are usually not very appealing for sure. The system in our country is broken in my opinion.

------------

Thank you everyone for your input. I'm now leaning towards selling now as long as I can feel good about the price. I may reach back out to the company president and see what additional info he can provide.
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by ivgrivchuck »

gnr wrote: Fri May 20, 2022 6:01 pm I did contact the company president and he said he could try to locate a buyer. I would then sell to the buyer and they would reissue the stock. I didn't ask about an independent appraisal. Is that something that is done on a routine basis? I also don't want to offend anyone by asking. It feels awkward asking those types of questions to the only person who can really help you sell the stock.

Part of my dilemma is knowing what a fair price is.
It's called a 409A valuation. Many private companies do it routinely (but obviously not everybody does it). It's not offending to ask.

There are companies like EquityZen which attempt to create a secondary markets for private stocks.
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Topic Author
gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

ivgrivchuck wrote: Fri May 20, 2022 8:14 pm
gnr wrote: Fri May 20, 2022 6:01 pm I did contact the company president and he said he could try to locate a buyer. I would then sell to the buyer and they would reissue the stock. I didn't ask about an independent appraisal. Is that something that is done on a routine basis? I also don't want to offend anyone by asking. It feels awkward asking those types of questions to the only person who can really help you sell the stock.

Part of my dilemma is knowing what a fair price is.
It's called a 409A valuation. Many private companies do it routinely (but obviously not everybody does it). It's not offending to ask.

There are companies like EquityZen which attempt to create a secondary markets for private stocks.
Thank you for that information about the 409A. I will certainly ask about that.

I would prefer to not use a 3rd party to sell the stock, but I might look into it to see if there is any advantage in doing so.

Thank you for your help!
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by crefwatch »

Not involving private company stock, but I had a similar situation with my own mother. I urge you not to feel so wedded to the high-dividend that she currently enjoys. Yes, she needs the money, but the investment is both illiquid and amounts to a concentrated holding in a single company - one that isn't even priced daily in a public auction market. My inclination is to set up a plan with the company to sell 25% of her holdings every year. (My mother died at 95, but that has no relevance to your situation!)

I now regret not selling (power of attorney) the high-yielding corporate subordinated notes I had bought for my mother, when she started to decline in her facility. They were quite liquid, but they happened to be 10% to 25% above par because of when I had bought them. They had "Death Puts" (more politely called Survivor Option) so I wasn't worried initially about interest rates going up. As it happened, in the five MONTHS (Covid) it took for the Surrogate's Court to authorize me as Executor, they all sank to near or below par, because of spiking interest rates in the US. I know you're not talking about bonds, but the point is that you don't have even as much control over the price you're going to get than you ... imagine ... you do!

I guess I'm telling you that I was too anchored to my purchase, and thought of high interest for the other three children in the Estate. And, BTW, I learned that it isn't that easy to exercise the Death Put!

It's a separate issue beyond the scope of this thread, but many fine nursing homes agree to accept Medicaid if someone has paid full Private Pay for a few years. Have you discussed this with her current facility? They are getting a good deal for now ... Are they watching her assets too?
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

crefwatch wrote: Sat May 21, 2022 1:05 pm Not involving private company stock, but I had a similar situation with my own mother. I urge you not to feel so wedded to the high-dividend that she currently enjoys. Yes, she needs the money, but the investment is both illiquid and amounts to a concentrated holding in a single company - one that isn't even priced daily in a public auction market. My inclination is to set up a plan with the company to sell 25% of her holdings every year. (My mother died at 95, but that has no relevance to your situation!)

I now regret not selling (power of attorney) the high-yielding corporate subordinated notes I had bought for my mother, when she started to decline in her facility. They were quite liquid, but they happened to be 10% to 25% above par because of when I had bought them. They had "Death Puts" (more politely called Survivor Option) so I wasn't worried initially about interest rates going up. As it happened, in the five MONTHS (Covid) it took for the Surrogate's Court to authorize me as Executor, they all sank to near or below par, because of spiking interest rates in the US. I know you're not talking about bonds, but the point is that you don't have even as much control over the price you're going to get than you ... imagine ... you do!

I guess I'm telling you that I was too anchored to my purchase, and thought of high interest for the other three children in the Estate. And, BTW, I learned that it isn't that easy to exercise the Death Put!

It's a separate issue beyond the scope of this thread, but many fine nursing homes agree to accept Medicaid if someone has paid full Private Pay for a few years. Have you discussed this with her current facility? They are getting a good deal for now ... Are they watching her assets too?
Thank you for sharing your situation. I do think I will go ahead and just sell all of the stock at once and be done with it. The amount is less than 10% of her total assets so I am probably just over-thinking it anyway trying to maximize her money. My main concern now, is to make sure I get a fair price. I plan to reach out to the company this week to ask more about the value and to see if they have a 409A.

This facility isn't considered a skilled nursing home but rather an assisted living/memory care facility. I don't believe they can accept Medicaid in my state. This is something that I may look into though just to be sure.

Thank you for your input!
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by IATaxguy »

Hello, I wanted to weigh in, as someone that has followed the space for years, as well as have dipped my fingers into buying nonpublic bank stock. That said, there are a number of considerations and thoughts. If you haven't already, there have been some threads in the past on the topic, such as:

viewtopic.php?t=143919
viewtopic.php?t=356771

As for where to get valuations, the gold standard would be to get an outside valuation, however, it would most likely be cost prohibitive for you. As well as there would be large discounts for both lack of control (as I'm assuming OP's mother is a minority owner) and lack of liquidity (as the ownership may be restricted, limited pool of buyers, etc), and that is before looking at a DCF, price to earnings, or relative valuation (most likely using publicly traded stocks and info from banking M&A activity). As otherwise, you could read the financial statement footnotes, which should mention if they have a stock option plan (and then if so, there should be disclosure about some of the valuation as well as they may have to do a 409A valuation as well). Or if they have an ESOP, which also would have disclosure about valuation (as a valuation has to be done annually for ESOPs).

If there is not a option plan or ESOP, then you could try to value it yourself, using publicly traded comps (as there are a number of banks of various sizes and market areas on the OTC market), and then a 25-50% discount for lack of control and liquidity. And as for where to start, some things that would increase valuation:

- Has a >8%+ ROE over multiple years and business cycles.
- Has a >1.2+% ROA over multiple years and business cycles.
- Low efficienty ratio
- Growing asset base and strong deposit franchise.
- Good loan quality.

Conversely, the opposite of the above would impact the valuation negatively as well. If you need to dig into historic information, you can request financial statements from the bank. However, there is also a large amount of public data available for banks.

If you want to post the bank name, I could take a look and give you further thoughts. But, for educational purposes, you can look at bank level data in the call reports (which you can google ffiec and call report, and it would take you to the tool to look at them). You can also see the data summarized at the website ibanknet.com (And this will also tell you if it is a C corp or S Corp, as well as the holding company name; as most banks in the US have a holding company for various reasons and the stock is for the holding company, and there may be holding company income and expenses on top of bank level info).

To address the liquidity issue, with nonpublic stock, the biggest issue is finding a buyer (as there are restrictions on how marketing of stock can be done and by whom). I've seen a handful of ways: 1) The company maintains a shareholder bulletin board where people can post their interest. 2) There is a list kept by the bank (usually by the president) and they can match people up. 3) You can throw it into the wind (such as posting in the local paper or craigslist), but there is usually very low response rate. 4) There are a handful of transfer agents that operate in this space or operate marketplaces (such as banclist), but again, very low response rate. And even if you find a buyer, if there is only one, then you are limited to whatever they offer.
Topic Author
gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

IATaxguy wrote: Sun May 22, 2022 9:57 am Hello, I wanted to weigh in, as someone that has followed the space for years, as well as have dipped my fingers into buying nonpublic bank stock. That said, there are a number of considerations and thoughts. If you haven't already, there have been some threads in the past on the topic, such as:

viewtopic.php?t=143919
viewtopic.php?t=356771

As for where to get valuations, the gold standard would be to get an outside valuation, however, it would most likely be cost prohibitive for you. As well as there would be large discounts for both lack of control (as I'm assuming OP's mother is a minority owner) and lack of liquidity (as the ownership may be restricted, limited pool of buyers, etc), and that is before looking at a DCF, price to earnings, or relative valuation (most likely using publicly traded stocks and info from banking M&A activity). As otherwise, you could read the financial statement footnotes, which should mention if they have a stock option plan (and then if so, there should be disclosure about some of the valuation as well as they may have to do a 409A valuation as well). Or if they have an ESOP, which also would have disclosure about valuation (as a valuation has to be done annually for ESOPs).

If there is not a option plan or ESOP, then you could try to value it yourself, using publicly traded comps (as there are a number of banks of various sizes and market areas on the OTC market), and then a 25-50% discount for lack of control and liquidity. And as for where to start, some things that would increase valuation:

- Has a >8%+ ROE over multiple years and business cycles.
- Has a >1.2+% ROA over multiple years and business cycles.
- Low efficienty ratio
- Growing asset base and strong deposit franchise.
- Good loan quality.

Conversely, the opposite of the above would impact the valuation negatively as well. If you need to dig into historic information, you can request financial statements from the bank. However, there is also a large amount of public data available for banks.

If you want to post the bank name, I could take a look and give you further thoughts. But, for educational purposes, you can look at bank level data in the call reports (which you can google ffiec and call report, and it would take you to the tool to look at them). You can also see the data summarized at the website ibanknet.com (And this will also tell you if it is a C corp or S Corp, as well as the holding company name; as most banks in the US have a holding company for various reasons and the stock is for the holding company, and there may be holding company income and expenses on top of bank level info).

To address the liquidity issue, with nonpublic stock, the biggest issue is finding a buyer (as there are restrictions on how marketing of stock can be done and by whom). I've seen a handful of ways: 1) The company maintains a shareholder bulletin board where people can post their interest. 2) There is a list kept by the bank (usually by the president) and they can match people up. 3) You can throw it into the wind (such as posting in the local paper or craigslist), but there is usually very low response rate. 4) There are a handful of transfer agents that operate in this space or operate marketplaces (such as banclist), but again, very low response rate. And even if you find a buyer, if there is only one, then you are limited to whatever they offer.
Thank you for your input. You are correct, that getting an actual evaluation would likely be cost prohibitive. The total value of the stock is only between 20-30K. (Slightly over 20 if you go by what I was told the last few sales were and just under 30 based upon book value.)

Here is a link to the company name (holding company) on the stock and dividend statements. https://ibanknet.com/scripts/callreport ... sa_1891317

Here is the link to the actual bank. https://ibanknet.com/scripts/callreport ... usa_935250

If you have the time to take a quick look, I would certainly appreciate your thoughts. Thank you!
bsteiner
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by bsteiner »

On the other hand, it's a small position, the market price reflects that it's small and thinly traded. Also, if she sells it she'll pay capital gains tax, whereas if she keeps it she'll get a basis step-up at death.
miket29
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by miket29 »

gnr wrote: Fri May 20, 2022 12:24 pm The stock does pay dividends which is about 3-4 times more than the amount of interest that would be paid if I sold the stock and put the money in a money market account.
Money-market funds tend to return less than the inflation rate so you could lose in inflation-adjusted dollars. Instead of a money market account you could buy TIPS bonds on the secondary market and pretty much keep up with inflation if you are confident you can hold them to maturity. The real (eg. inflation-adjusted) return for TIPS 4 years out is currently negative; for Apr 2026 it is -0.258% so you'd lose 1% in real value if held to term.

TIPS returns can be seen at https://www.wsj.com/market-data/bonds/t ... _tips_full

edit: given the total amount is around $20K then you might want to just buy i-bonds with the proceeds, the limit is 10K/yr. The redemption value can never drop, unlike TIPS if sold before maturity. There is a one-year lockup before being able to redeem.
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

bsteiner wrote: Sun May 22, 2022 1:55 pm On the other hand, it's a small position, the market price reflects that it's small and thinly traded. Also, if she sells it she'll pay capital gains tax, whereas if she keeps it she'll get a basis step-up at death.
That's a good point. I didn't realize the cost basis would reset in that situation. However, as long as she lives 2-3 years or longer, it won't matter as her facility costs are tax deductible under medical so I am making sure that her income (SS and IRA distributions) are less than her itemized expenses so she won't pay any tax. How long she lives, is anyone's guess but I am trying to just focus on my task of managing her money the best I can without factoring in what happens with whatever is left at the time of her death.

My concern with the stock is that the value could go to zero as others have mentioned in previous posts. I'm conservative by nature so I'm thinking I should probably just get rid of it rather than risking it all even if I miss out on some tax savings if she were to pass.
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

miket29 wrote: Sun May 22, 2022 2:16 pm
gnr wrote: Fri May 20, 2022 12:24 pm The stock does pay dividends which is about 3-4 times more than the amount of interest that would be paid if I sold the stock and put the money in a money market account.
Money-market funds tend to return less than the inflation rate so you could lose in inflation-adjusted dollars. Instead of a money market account you could buy TIPS bonds on the secondary market and pretty much keep up with inflation if you are confident you can hold them to maturity. The real (eg. inflation-adjusted) return for TIPS 4 years out is currently negative; for Apr 2026 it is -0.258% so you'd lose 1% in real value if held to term.

TIPS returns can be seen at https://www.wsj.com/market-data/bonds/t ... _tips_full

edit: given the total amount is around $20K then you might want to just buy i-bonds with the proceeds, the limit is 10K/yr. The redemption value can never drop, unlike TIPS if sold before maturity. There is a one-year lockup before being able to redeem.
I don't know that much about TIPS but I do have some I-Bonds of my own so I am somewhat familiar with them. My fear with that is having to redeem them for her or dealing with them as a beneficiary if she were to pass. I just would prefer to avoid as many complications and hoops to jump through as possible. I may look into this though and see what is involved.
IATaxguy
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by IATaxguy »

gnr wrote: Sun May 22, 2022 1:47 pm If you have the time to take a quick look, I would certainly appreciate your thoughts. Thank you!
I had a few minutes this morning, so decided to take a look and had the following thoughts:

- It looks like ROE has been decent over the past 5 years, averaging 10.8%, and ROA a bit less, averaging .9% over the same time frame.
- It looks like they had major issues during the GFC, losing 31% of equity in 2009, and had loss in 2008, 2009, 2011.
- They did take TARP money and it looks like it was repaid in 2017.
- They did an equity offering in 2011, and sold roughly $500k of stock (substantially less than the $4M they wanted to).
- Otherwise, the only stock transaction I saw was in 2021 (could only see back to 2016).
- Like a lot of other banks, they had a decent sized available for sale security portfolio (mostly gov debt) going into Q1 2022, and like a lot of others, did get wacked by interest rates (which impacted the valuation of the portfolio, and took a 4-5M AOCI/equity hit in that quarter, which was roughly 8% of equity.
- As of 2019, it looks like it is controlled by the Reich family group.

In short, it looks like management is okay, but not stellar. At times, it does look like they used hot deposits to grow, and have had significant growth over the past few years (really starting around 2016, and from 2006-2015 net assets were in the range of $470-490M). So, I would probably worry that they are chasing growth, as the capital ratio is less than I would want (looks like 8.4% at the end of 2021) and would closely monitor the loan book (as that was the big cause of the 2009 loss). And it doesn't appear that they are stellar at loan origination (and it looks like a fair bit is in risky forms of CRE) or portfolio management.

So, if I had to do a back of the napkin calculation, it would probably be worth a bit less than comparable banks. And if you want to use 2020 data on OTC banks (from oddballstock's blog), it would be a bit less than the range of 64-84% of NBV.
Boglegrappler
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by Boglegrappler »

It's worth noting that at present, the bank merger and acquisition market has shifted from what it was not so long ago. The move towards online and electronic banking has caused larger banks to be much less enamored with buying bricks and mortar banks with lots of branches in order to acquire the cheap "sticky" deposit base. (Sticky means that the depositors don't withdraw and head elsewhere for higher yields when rates rise. )

Every situation is different and has its own circumstances, but it's useful to be aware of the overall environment.
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

IATaxguy wrote: Mon May 23, 2022 8:59 am
gnr wrote: Sun May 22, 2022 1:47 pm If you have the time to take a quick look, I would certainly appreciate your thoughts. Thank you!
I had a few minutes this morning, so decided to take a look and had the following thoughts:

- It looks like ROE has been decent over the past 5 years, averaging 10.8%, and ROA a bit less, averaging .9% over the same time frame.
- It looks like they had major issues during the GFC, losing 31% of equity in 2009, and had loss in 2008, 2009, 2011.
- They did take TARP money and it looks like it was repaid in 2017.
- They did an equity offering in 2011, and sold roughly $500k of stock (substantially less than the $4M they wanted to).
- Otherwise, the only stock transaction I saw was in 2021 (could only see back to 2016).
- Like a lot of other banks, they had a decent sized available for sale security portfolio (mostly gov debt) going into Q1 2022, and like a lot of others, did get wacked by interest rates (which impacted the valuation of the portfolio, and took a 4-5M AOCI/equity hit in that quarter, which was roughly 8% of equity.
- As of 2019, it looks like it is controlled by the Reich family group.

In short, it looks like management is okay, but not stellar. At times, it does look like they used hot deposits to grow, and have had significant growth over the past few years (really starting around 2016, and from 2006-2015 net assets were in the range of $470-490M). So, I would probably worry that they are chasing growth, as the capital ratio is less than I would want (looks like 8.4% at the end of 2021) and would closely monitor the loan book (as that was the big cause of the 2009 loss). And it doesn't appear that they are stellar at loan origination (and it looks like a fair bit is in risky forms of CRE) or portfolio management.

So, if I had to do a back of the napkin calculation, it would probably be worth a bit less than comparable banks. And if you want to use 2020 data on OTC banks (from oddballstock's blog), it would be a bit less than the range of 64-84% of NBV.
Thank you so much for taking the time to look at this and provide your evaluation. The family group you found is still in control and has been for decades. The previous stock sale figure that I was given is roughly 2/3 of book value so that seems to be roughly in line with the range you noted above.

After looking over your analysis, I think I am inclined to go ahead and see if the bank president can find a buyer at a similar value as the most recent sale. The more I think about it, the more conservative I become as I can't afford to risk losing this asset.

The stock pays its dividends quarterly and an extra one in Dec. I am not sure how long this type of a transaction will take, but would it be out of line to request that the sale take place after the next dividend is paid?

Again, thank you for your help!
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

Boglegrappler wrote: Mon May 23, 2022 9:34 am It's worth noting that at present, the bank merger and acquisition market has shifted from what it was not so long ago. The move towards online and electronic banking has caused larger banks to be much less enamored with buying bricks and mortar banks with lots of branches in order to acquire the cheap "sticky" deposit base. (Sticky means that the depositors don't withdraw and head elsewhere for higher yields when rates rise. )

Every situation is different and has its own circumstances, but it's useful to be aware of the overall environment.
So, it sounds like you are saying that since the environment is changing, I am becoming less likely to see the stock value increase due to a sale to a larger bank. Correct?
Boglegrappler
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by Boglegrappler »

Yes, but that is speaking in general without specific knowledge of the specific bank that you hold stock in.

It is, however, accurate as to the current environment. Some of the larger banks would like to get rid of some of their branches, as opposed to buying someone else who has lots of branches.
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vineviz
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by vineviz »

gnr wrote: Fri May 20, 2022 6:01 pm Yes, I have communicated with the company president who worked with my mother for a long time. He offered to reach out to some of the individuals who recently had transactions to see if they were interested. She doesn't need the money right now. As long as her health conditions don't change, she won't need it for about 4 years or so when her piggy bank dries up.
It's likely to be a somewhat complicated transaction, and even if you have durable power of attorney it's not inconceivable (I'm not a lawyer, much less YOUR lawyer) that you might hit a step in which having your mother available without any diminishment of mental capacity might be helpful.

My preference would be to sell the private stock sooner rather than later if you can get what you think is a reasonable price.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by rossington »

gnr wrote: Sun May 22, 2022 3:01 pm I just would prefer to avoid as many complications and hoops to jump through as possible.
Thus if you wait to sell you could be in a bind for your mom financially. For the reasons stated above (as it pertains to selling the stock...not TIPS) I agree that it does make sense to seriously get into the process of selling as it (as you know) may take longer than you anticipate.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

Boglegrappler wrote: Thu Jun 02, 2022 3:39 pm Yes, but that is speaking in general without specific knowledge of the specific bank that you hold stock in.

It is, however, accurate as to the current environment. Some of the larger banks would like to get rid of some of their branches, as opposed to buying someone else who has lots of branches.
Thanks for the clarification.

By the way..The bank president informed me that there was an appraisal done last fall and the few transactions that have occurred since then have been at the appraised price. Since I really have no feasible way of challenging that price, I told him I would like them to see if he can find a buyer at that price. Since my mother worked closely with him in the past, I do trust that he wouldn’t steer me wrong.

Thanks!
Last edited by gnr on Wed Jun 29, 2022 4:31 pm, edited 1 time in total.
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

vineviz wrote: Thu Jun 02, 2022 4:03 pm
gnr wrote: Fri May 20, 2022 6:01 pm Yes, I have communicated with the company president who worked with my mother for a long time. He offered to reach out to some of the individuals who recently had transactions to see if they were interested. She doesn't need the money right now. As long as her health conditions don't change, she won't need it for about 4 years or so when her piggy bank dries up.
It's likely to be a somewhat complicated transaction, and even if you have durable power of attorney it's not inconceivable (I'm not a lawyer, much less YOUR lawyer) that you might hit a step in which having your mother available without any diminishment of mental capacity might be helpful.

My preference would be to sell the private stock sooner rather than later if you can get what you think is a reasonable price.
Hopefully, there won’t be any problems. It should be helpful that my mother worked with the bank president and he can help vouch for the situation with the buyer.

I agree, after more thought, I have decided to proceed with trying to sell it now as opposed to later. I reached out to the bank just yesterday with the request so we’ll see what happens.

Thanks!
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

rossington wrote: Fri Jun 03, 2022 1:16 am
gnr wrote: Sun May 22, 2022 3:01 pm I just would prefer to avoid as many complications and hoops to jump through as possible.
Thus if you wait to sell you could be in a bind for your mom financially. For the reasons stated above (as it pertains to selling the stock...not TIPS) I agree that it does make sense to seriously get into the process of selling as it (as you know) may take longer than you anticipate.
I think you are 100% correct. Originally, I was blinded by trying to maximize every penny but after getting everyone’s opinion and thinking about it more, it makes sense to do it now for sure.

Thanks!
twh
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by twh »

Here's another way to look at is:
If the position is small, just simplify. You will need to deal with this sooner or later.
If the position is large, you need to diversify.
So, the answer is you need to deal with it one way or another.
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gnr
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by gnr »

twh wrote: Wed Jun 29, 2022 4:44 pm Here's another way to look at is:
If the position is small, just simplify. You will need to deal with this sooner or later.
If the position is large, you need to diversify.
So, the answer is you need to deal with it one way or another.
Thanks for that perspective. I’ve decided to go ahead and sell if a buyer can be found. One less thing to deal with later.
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Re: Elderly Parent's Private Company Stock - Sell or Keep?

Post by Valuethinker »

gnr wrote: Sun May 22, 2022 3:01 pm
miket29 wrote: Sun May 22, 2022 2:16 pm
gnr wrote: Fri May 20, 2022 12:24 pm The stock does pay dividends which is about 3-4 times more than the amount of interest that would be paid if I sold the stock and put the money in a money market account.
Money-market funds tend to return less than the inflation rate so you could lose in inflation-adjusted dollars. Instead of a money market account you could buy TIPS bonds on the secondary market and pretty much keep up with inflation if you are confident you can hold them to maturity. The real (eg. inflation-adjusted) return for TIPS 4 years out is currently negative; for Apr 2026 it is -0.258% so you'd lose 1% in real value if held to term.

TIPS returns can be seen at https://www.wsj.com/market-data/bonds/t ... _tips_full

edit: given the total amount is around $20K then you might want to just buy i-bonds with the proceeds, the limit is 10K/yr. The redemption value can never drop, unlike TIPS if sold before maturity. There is a one-year lockup before being able to redeem.
I don't know that much about TIPS but I do have some I-Bonds of my own so I am somewhat familiar with them. My fear with that is having to redeem them for her or dealing with them as a beneficiary if she were to pass. I just would prefer to avoid as many complications and hoops to jump through as possible. I may look into this though and see what is involved.
TIPS bonds are totally liquid. One of the most liquid securities in the world.

(sometimes I read that they are "illiquid" but that is against normal US Treasury bonds, which are the world's most liquid security. The Pacific is bigger than the Atlantic Ocean, but no one would call the latter "small").

Probably a Short Term TIPS fund is best. As per poster miket29, it would guarantee your mother against inflation. There would be a fairly small real loss as TIPS are trading at a negative real yield BUT TIPS protect against *unexpected* inflation, so if we have more of the sort of supply-side inflation we have been experiencing, TIPS are the only instrument that protects against that (ibonds are the other). In other words, it's only if inflation is as expected by the market that you will incur a real loss.

The problem with Money Market Funds etc is that interest rates are not keeping up with CPI inflation right now. The erosion of the purchasing power of your money is very painful.

One could own TIPS directly, but there is hassle associated with that -- buying either in the secondary market or at issue.

Dealing with a TIPS fund should not be difficult (I am not US based, though).
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