Banks & Insurance | Finding Efficiencies for a CEO

The president and CEO of an insurance company based in New York was referred to us by one of our clients. We reviewed her company’s proxy statement and other public information as part of our standard preparation for an initial meeting. That review helped us identify a number of ways we could not only help her with her personal finances but also benefit her company.

Changing negative market signals

The proxy revealed that she had pledged a significant number of company shares on margin. Doing so sends a negative signal to shareholders, as it represents a risk to the executive: should the stock price decline, she may be forced to sell. Her interests were therefore not fully aligned with those of the company. When we discussed this with her, she told us that she had put a margin line in place to have a ready source of funds for emergencies. She had other sources of liquidity, and we suggested that she take advantage of current low rates with a mortgage and establish a line of credit against her other liquid assets, taking debt and the pledge off her public balance sheet.

Identifying tax efficiencies

Her company was doing well, but while employees were being issued restricted stock, there was no indication they could make an 83(b) election, which could provide significant potential savings in taxes. By making an 83(b) election when the restricted shares were granted, she would in effect be starting the clock on the long-term capital gains holding period earlier than she would if she were to wait until the shares vested. By making the election and triggering ordinary income taxes, she would be paying those taxes earlier – but based on a lower value than what she expected the stock would be worth in the future. She would also be sending two positive public signals to the market: that she is committed to staying with the firm (because she would forfeit the shares if she left before actual vesting), and the company is doing well.

Increasing gifting opportunities

The proxy also revealed that she and her husband had funded an irrevocable trust for the benefit of their two children, indicating that providing for them was important to her. However, her executive Form 4 did not specifically state that non-qualified stock options were transferable, limiting the possibilities for gifting equity in the company— for both her and other executives at her company. We therefore suggested that the company’s plan allow for the transfer of non-qualified options to family members of trusts. In addition, we encouraged her to take full advantage the lifetime gift tax exclusion for her and her husband. Doing so by transferring more shares to the children’s trust would remove them from her balance sheet and allow her family to benefit sooner from compound returns over time. It would also send positive signals to the market that she expects the stock to appreciate.

Greater freedom to focus on your company

The CEO appreciated both the breadth of ideas we brought to her and our ability to execute solutions across both sides of her balance sheet, leaving her free to focus on driving her company’s success. We are able to offer these and other strategies and insights based on our experience working exclusively with CEOs and financial leaders.

We look forward to speaking with you on how the Financial Institutions Group’s advice and insight can help fulfill your vision.

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This material is intended to help you understand the financial consequences of the concepts and strategies discussed here in very general terms. The strategies discussed often involve complex tax and legal issues.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances.

All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. Results shown are not meant to be representative of actual results. Information and outcome is not a guarantee of future results.

Investors should be cautious when holding a highly concentrated stock position, which is typically defined as any individual holding that constitutes more than 30% of overall investment holdings. Tax consequences, including the avoidance of capital gains through selling, do not eliminate the risks of overexposure to a particular company or business sector.

Hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.


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