ASSET DIVERSIFICATION TRUSTS
Hiding in Plain Sight: New Opportunities to Support Clients
By Roger D. Silk and Katherine Silk
Many excellent financial planners find differentiating themselves to attract new clients and add value for existing clients among their greatest challenges. This article provides a strategy advisors can use to separate from the pack by offering a tax-efficient way for clients to make the most of their appreciated assets by using an asset diversification trust.
Opportunities in Appreciated Assets
The majority of private wealth in the U.S. is not in retirement plans or in non-qualified money some advisor is managing.
Advisors we work with frequently find they already have clients who own significant wealth in the form concentrated stock positions, real estate, businesses, and crypto. These clients often want to convert that wealth into portfolio wealth.
Clients want to avoid the unnecessary risk represented by a large holding in a single stock. Tesla, Apple, Nvidia, Amazon, and many other smaller, less well-known companies have made shareholders wealthy but the volatility causes sleepless nights. The combined market cap of the biggest companies is well over $10 trillion, and much of that is held by ordinary people in chunks of a million dollars or more.
Many real estate investors come to a point in their lives where they just get tired of dealing with the hassles of “tenants, toilets and trash.” If they don’t have kids interested in taking over, they often want to sell.
Owners of small and medium size businesses (so-called lower- and lower-middle-market) face dual problems of aging and the fact that the vast majority of businesses have a lifecycle. Most small businesses do not sell in time. But for owners who can sell, they can transform their lives. An estimated three million businesses in the U.S. generate at least a million dollars per year in revenue.1
Client’s Tax Problem, Advisor’s Opportunity to Help
The groups of wealthy people noted above are diverse in the source of their wealth but they all face the common problem of capital gains taxes on sale of their assets.
Consider a client who has no basis in an asset worth $3 million. To make the math simple, assume a combined capital gains tax rate of 33.3%. If the client sells in the ordinary way and pays the tax, the client keeps only $2 million.
The client’s problem is that he will pay about $1 million in tax.
But what if the client could sell the asset and avoid tax on the sale? That would allow the client to retain significantly more wealth.
Introducing the Asset Diversification Trust
The solution to the issue above—enabling clients to sell without paying capital gains tax upon the sale, providing flexible income, and locking in wealth for the next generation—is an asset diversification trust.
This trust’s tax-exempt status originates in Section 664 of the tax code, which has been in existence since 1969. The traditional use of Section 664 is for charitable remainder trusts, which are great fundraising tools for charities, and as a consequence are usually used only in situations where charity is a main client motivator. This significantly limits the appeal of the traditional charitable remainder trust.
Asset diversification trusts are useful for clients where charity is not a primary or often even a secondary motivator. The particular approaches and terms implemented to make asset diversification trusts work as well as they do are not widely known. As a result, asset diversification trusts, in all their forms, are underused by advisors and clients—an oversight we hope this article will help fix.
An asset diversification trust enables a client to contribute assets to a trust, sell those assets without paying capital gains tax, retain the entire pre-tax proceeds, and reinvest the proceeds into a wide range of portfolios. In the typical case, either a single client or both spouses are able to obtain a percentage payout from the trust for their entire lives. After the client and spouse die, their kids—and sometimes even grandkids—have the right to receive payouts from the trust.
Case Study—Brian’s Apple Shares
Brian and Lena owned $10 million of Apple stock, which represented about 70% of their net worth. They were worried about the fact that Apple constituted the bulk of their net worth. Although they thought Apple was a great company, they were quite aware that no company is immune to risk.
Brian and Lena had thought about selling but they didn’t want to pay the $3.5 million in tax that would result from a sale.
Their advisor, Carey, suggested they consider a tax-exempt asset diversification trust. Carey came up with a solution tailored for Brian and Lena so they could sell their Apple stock and have the entire pre-tax proceeds available for reinvestment.
Via the tax-exempt trust, Carey sold the Apple stock in January 2025, when the stock was about $250 per share. Because the trust is tax-exempt, there was no capital gains tax on the sale—and the entire $10 million was reinvested. This assures Brian and Lena an income starting at about half a million a year and likely growing—for themselves for their entire lives, and then for the lifetimes of their two kids.
Conclusion
One of the hardest tasks advisors face is bringing on new clients. Advisors who are familiar with the benefits of asset diversification trusts can differentiate themselves, making it easier to stand out and attract new clients.
Advisors can support existing client relationships to help clients convert stuck assets—real estate, crypto, businesses, and concentrated stock holdings—into lower risk, lower hassle assets, while not paying the big upfront capital gains taxes when the assets are sold.
This is an excellent strategy for adding value for clients, which will make them less likely to leave and more likely to tell their friends about your practice.
1 https://www.601media.com/
Roger D. Silk, Ph.D. is the CEO of Sterling Foundation Management, LLC. Dr. Silk’s Ph.D. is from Stanford University. He is the author of four books, and the forthcoming Capital Gains Exit Ramp.
Katherine Silk, MA, is a Senior Analyst at Sterling Foundation Management. She is a Certified Exit Planning Advisor (CEPA), and holds a B.A. in economics and M.A. in history, both from Stanford University.
image credit: Adobe Stock Images