When a company goes public or is acquired, its founders and key executives often emerge holding an enormous amount of wealth concentrated in a single stock. The wealth is real, but it is also fragile. A single company’s fortunes can change quickly, and the same equity that made a founder wealthy can lose half its value in a matter of months. At the same time, the tax cost of simply selling the position can be staggering — federal capital gains tax, the net investment income surtax, and state income tax can together consume more than a third of the proceeds. And overlaid on all of this is the estate planning question: how should this concentrated, highly appreciated, potentially illiquid position be managed in the context of an overall wealth transfer plan? The answer requires coordinating among securities law, income tax, and estate planning — three distinct bodies of law that do not always point in the same direction.

The Concentrated Position Problem

The concentrated position problem is a convergence of three related risks. The first is investment risk: when a significant portion of a founder’s net worth is held in a single stock, the founder’s financial security rises and falls with that one company. A market correction, a disappointing earnings report, a product recall, or a regulatory investigation can wipe out a substantial fraction of the founder’s wealth, with no diversifying positions to cushion the blow. Financial theory and common sense alike argue for diversification, but the tax cost of achieving it through outright sale is often prohibitive.

The second risk is liquidity risk. Even if the stock is publicly traded, the founder may not be free to sell it. Post-IPO founders are typically subject to a 180-day lockup agreement — a contractual commitment to the underwriters not to sell, transfer, or hedge shares during the lockup period. After the lockup expires, the founder’s ability to sell may still be constrained by SEC Rule 10b-5, which prohibits trading on the basis of material non-public information (MNPI). A founder who serves as CEO, CFO, or a director of the public company will almost certainly possess MNPI for much of any given year, limiting the periods during which trading is legally permitted.

The third risk is an estate planning risk. A concentrated, low-basis position in a publicly traded stock creates a distinctive estate planning challenge: the unrealized gain is a contingent liability that must be managed as part of the overall estate plan. If the founder holds the stock until death, the heirs receive a stepped-up basis under Section 1014 of the Internal Revenue Code, eliminating the income tax on the gain — but the full fair market value of the stock is included in the taxable estate for estate tax purposes. If the founder sells the stock during life, the income tax is triggered but the after-tax proceeds reduce the estate (and can be deployed in further estate planning). Neither outcome is ideal in isolation, and the optimal strategy typically involves some combination of lifetime transfers, charitable giving, hedging, and gradual sales executed through carefully designed trading plans.

Hedging Restrictions During Lockup and the Role of Insider Trading Rules

The 180-day post-IPO lockup period is a contractual restriction, not a statutory one, but it is effectively absolute: the underwriters negotiate lockup agreements as a condition of the IPO, and the company’s stock exchange listing agreement may also incorporate lockup requirements. During the lockup period, the founder cannot sell, transfer, pledge, or otherwise dispose of shares, and — critically — cannot enter into any derivative transaction (such as a put option or a forward contract) that has the economic effect of hedging the position. Violations of the lockup agreement expose the founder to liability to the underwriters and the company.

After the lockup period expires, the insider trading rules take over as the primary constraint on the founder’s trading activity. SEC Rule 10b-5 prohibits trading while in possession of MNPI. For executives and directors of public companies, MNPI is a near-constant companion — they know about unreported earnings, pending acquisitions, product developments, and regulatory matters that the investing public does not. The SEC’s enforcement of insider trading rules has been aggressive and consequential, with criminal prosecutions and civil penalties that can dwarf the profits from any trade.

The practical result is that founders of recently public companies often find themselves in a difficult position: they cannot sell during the lockup, and after the lockup they cannot sell during blackout periods or when they possess MNPI. The combined effect can leave a founder effectively unable to trade for long stretches of time, holding a highly volatile, highly appreciated position with no ability to manage the risk. This is precisely the problem that Rule 10b5-1 plans are designed to solve.

Rule 10b5-1 Plans and Their Estate Planning Interaction

A Rule 10b5-1 plan is a written trading plan that an insider establishes at a time when the insider does not possess MNPI. The plan specifies in advance the amount, price, and timing of trades to be executed in the future. Because the trading decisions are made at the time the plan is established — when the insider is not in possession of MNPI — the subsequent execution of trades pursuant to the plan does not constitute insider trading, even if the insider later comes into possession of MNPI. The plan operates as an affirmative defense against insider trading liability.

In 2023, the SEC adopted amendments to Rule 10b5-1 that significantly tightened the requirements for valid plans. Under the amended rule, insiders (other than companies conducting share repurchases) must observe a cooling-off period between the adoption of a plan and the first trade: for officers and directors, the cooling-off period is the later of 90 days after adoption or the next quarterly earnings release, up to a maximum of 120 days. The amended rule also limits insiders to a single outstanding single-trade plan in any 12-month period (with exceptions for certain planned single trades), requires officers and directors to certify that they are not aware of MNPI when adopting the plan, and prohibits plans that allow the insider to exercise discretion over the timing, amount, or pricing of trades.

From an estate planning perspective, a Rule 10b5-1 plan can be coordinated with trust funding and gifting strategies. A founder who plans to make annual gifts to a GRAT or IDGT from the proceeds of stock sales can establish a 10b5-1 plan that pre-schedules sales at regular intervals, with the proceeds directed to fund the planned gifts. Alternatively, the plan can be designed to transfer shares directly to a trust, rather than cash, if the trust documents and the 10b5-1 arrangement are drafted consistently. The important point is that the 10b5-1 plan must be established at a time when the founder is not in possession of MNPI and the plan must otherwise comply with the amended Rule’s requirements; it cannot be retroactively adopted to facilitate a gift that has already been decided upon.

Exchange Funds

An exchange fund (sometimes called a contribution or swap fund) is a private investment partnership that allows multiple investors, each holding a different appreciated security, to contribute their shares to the fund in exchange for a partnership interest representing a proportionate share of the fund’s diversified portfolio. The contribution of appreciated stock to the exchange fund is structured as a non-taxable contribution under Section 721 of the Code — the same provision that governs contributions to a partnership. The investor’s basis in the fund interest equals the investor’s basis in the contributed shares, so no gain is recognized at the time of contribution.

The diversification benefit of the exchange fund is significant: instead of holding a concentrated position in a single stock, the investor now holds a partnership interest in a fund that contains dozens of different securities. After a holding period of at least seven years (required to avoid the fund being treated as an investment company under Section 351(e)), the investor can withdraw a pro-rata basket of the fund’s securities, achieving diversification with a carried-over basis — effectively deferring the capital gains tax indefinitely. If the investor holds the fund interest until death, the heirs receive a stepped-up basis under Section 1014.

Exchange funds are not available to everyone. They are private investment vehicles available only to accredited investors (and typically to qualified purchasers under the Investment Company Act), and the minimum contribution size is usually $1 million or more. The fund must hold at least 20 percent of its assets in illiquid investments (such as real estate) to satisfy the non-investment-company requirements, which introduces its own risk profile. Management fees and other fund expenses reduce the net return. And the seven-year holding period means the investor cannot access the full value of the contribution for a significant period. Nevertheless, for a founder with a large, low-basis concentrated position and no immediate need for liquidity, an exchange fund can be a highly effective diversification tool.

Charitable Remainder Trusts for Diversification

A Charitable Remainder Trust (CRT) is an irrevocable trust that allows a donor to contribute appreciated property, receive an income stream for life or a term of years, take a partial charitable income tax deduction in the year of contribution, and ultimately direct the trust remainder to a charitable beneficiary. When a CRT is used to manage a concentrated position, the mechanics work as follows: the founder contributes highly appreciated stock to the CRT; the trust sells the stock tax-free (because the trust is a tax-exempt entity) and reinvests the proceeds in a diversified portfolio; the trust pays an annuity or unitrust amount to the founder for the specified term; and at the end of the term, the remaining assets pass to the designated charity.

The income tax deduction available at the time of the CRT contribution is equal to the present value of the remainder interest that will ultimately pass to charity, calculated using IRS tables and the applicable Section 7520 rate. In a low-interest-rate environment, the present value of a far-future charitable remainder is relatively low, which means the upfront deduction is modest. In a higher-rate environment, the deduction is somewhat more generous. The income stream from the CRT — the annuity or unitrust payment — is taxable to the founder, with the character of the income determined by a four-tier ordering rule: the worst-taxed income (ordinary income) is distributed first, followed by capital gains, tax-exempt income, and return of basis.

From an estate planning perspective, a CRT funded with appreciated stock accomplishes several objectives simultaneously: it eliminates the immediate capital gains tax on the sale of the concentrated position, achieves portfolio diversification, provides the founder with a predictable income stream, and makes a significant charitable gift at the founder’s death. The trade-off is that the trust assets are no longer part of the founder’s taxable estate (they will ultimately pass to charity, not to the founder’s heirs), so a CRT is most appropriate for founders who have charitable inclinations and who have other assets to provide for their heirs. Some founders pair a CRT with a wealth replacement strategy using life insurance to replace the value of the assets transferred to the CRT.

Collars and Hedging Strategies

A collar is a derivative strategy that limits both the downside risk and the upside potential of a stock position. In a standard collar transaction, the investor buys a protective put option (the right to sell the stock at a specified floor price) and simultaneously sells a covered call option (giving a counterparty the right to buy the stock at a specified ceiling price). The premium received from selling the call option offsets part or all of the cost of buying the put, sometimes resulting in a zero-cost collar. The investor is protected from losses below the put strike price but gives up gains above the call strike price.

The income tax treatment of collars is governed by the constructive sale rules of IRC Section 1259 and the straddle rules of IRC Section 1092. Section 1259 provides that if a taxpayer enters into a “constructive sale” of an appreciated financial position — defined as a transaction that substantially eliminates all risk of loss and opportunity for gain — the taxpayer is treated as having sold and reacquired the position on the date of the constructive sale, triggering immediate recognition of gain. A collar can constitute a constructive sale if the put and call strike prices are too close together (the collar is too “tight”), eliminating substantially all risk and reward from the position.

Properly structured, a collar that maintains meaningful economic exposure — for instance, a put at 90 percent of the current market price and a call at 120 percent — should not constitute a constructive sale, though the analysis is highly fact-specific and the IRS has not provided bright-line guidance on the required spread between the put and call strikes. The straddle rules of Section 1092 may require the investor to capitalize holding period costs related to the collar (interest, dividends, and carrying charges) rather than deducting them currently.

For estate planning purposes, a collared position has a value somewhere between the floor and the ceiling established by the collar. A gift of a collared position to a trust would be valued at its fair market value, taking into account both the restriction on downside loss and the cap on upside gain. Collared shares that have been contributed to a GRAT or IDGT will generally continue to be governed by the collar terms, and the annuity or trust payments must be analyzed in light of the restricted value of the collared shares.

Prepaid Variable Forward Contracts

A prepaid variable forward (PVF) contract is a transaction in which a founder agrees to deliver a variable number of shares (or the cash equivalent) to a counterparty at a future date, in exchange for a cash payment made today. The amount of shares to be delivered at maturity depends on the stock price at that time: if the stock price has risen above a ceiling, the founder delivers fewer shares (the upside is capped); if the stock price has fallen below a floor, the founder delivers more shares (the downside is limited). In between the floor and the ceiling, the number of shares delivered varies proportionally with the price.

The PVF provides the founder with immediate liquidity without (if structured correctly) triggering an immediate taxable sale. The IRS has challenged PVFs on the grounds that they constitute constructive sales under Section 1259 or that the cash advance should be treated as a loan with the shares as collateral (in which case the gain would be recognized when the shares are finally delivered). The tax treatment of PVFs remains uncertain and continues to be litigated, so founders considering a PVF should obtain a careful legal and tax opinion before proceeding.

For estate planning purposes, a PVF creates a complex set of rights and obligations. The founder has received cash (which is in the estate) but has an obligation to deliver shares (which reduces the estate value). The net estate value attributable to the PVF is the fair market value of the shares minus the present value of the delivery obligation. Planning around a PVF requires careful coordination between the estate planning attorney and the founder’s tax and financial advisors.

GRAT Strategies with Publicly Traded Stock Post-IPO

A Grantor Retained Annuity Trust (GRAT) funded with publicly traded stock benefits from the same mechanics as a GRAT funded with private company interests, but with a different risk and reward profile. A GRAT transfers wealth to remainder beneficiaries only if the total return on the trust assets (dividends plus price appreciation) exceeds the Section 7520 hurdle rate during the GRAT term. For private company stock, achieving this hurdle often requires a liquidity event or significant appreciation in the company’s valuation. For publicly traded stock, the total return is determined by the public market.

Post-IPO tech stocks are often excellent GRAT candidates precisely because of their volatility. A volatile stock has a higher probability of generating the outsized returns necessary to produce significant GRAT wealth transfer, even in a relatively short GRAT term. The strategy of using rolling, short-term GRATs (sometimes called “serial GRATs”) takes advantage of this volatility: the grantor establishes a series of short-term (two-year) GRATs, funding each new GRAT with the annuity received from the previous one. If the stock performs well in a given two-year period, the GRAT succeeds and passes wealth to the remainder beneficiaries; if the stock underperforms, the GRAT terminates with the grantor having received back approximately what was contributed, and a new GRAT is funded with the returned assets. Over time, the strategy captures the upside of favorable market periods while limiting the cost of unfavorable ones.

Estate Planning with RSUs and Performance Shares Post-IPO

Founders and executives of recently public companies often hold large numbers of restricted stock units (RSUs) and performance shares that were granted pre-IPO and will vest over a period of years following the IPO. When an RSU vests, the fair market value of the underlying shares on the vesting date is taxable as ordinary income to the employee. For a senior executive at a high-flying tech company, a single RSU vesting event can generate millions of dollars of ordinary income — taxed at rates as high as 37 percent federally, plus applicable state income taxes.

RSUs present a distinctive estate planning challenge because they are not transferable before vesting (they are unsecured promises to deliver shares), so most estate planning transfers cannot be made before the income tax liability is triggered. Once the RSUs vest and the shares are received, the executive holds shares with a basis equal to the ordinary income recognized — which may be close to the current market price, making the unrealized gain at that moment relatively small. Over time, as the shares appreciate beyond the vesting-date value, the familiar concentrated position problem re-emerges.

Some companies permit executives to elect to defer RSU vesting proceeds into a nonqualified deferred compensation plan, which can defer the income tax liability but creates other planning considerations, including the risk that the deferred amounts are subject to a substantial risk of forfeiture and are ultimately included in the executive’s estate at their full value. Performance shares present additional complexity because their vesting depends on meeting specified performance metrics, which introduces valuation uncertainty similar to an earnout.

Practical Guidance for Post-IPO Founders

Navigating a concentrated position after an IPO or exit requires a coordinated, multi-disciplinary team: an estate planning attorney to structure trusts and transfers, a tax advisor to model the income tax consequences of various strategies, an investment advisor to manage the portfolio and execute hedging strategies, and a securities attorney to ensure compliance with Rule 10b5-1 and insider trading rules. No single professional has all of the necessary expertise, and the strategies interact in ways that require genuine collaboration.

The framework for evaluating concentrated position strategies should consider several dimensions: the founder’s liquidity needs, the timeline for diversification, the founder’s tolerance for ongoing concentration risk, the founder’s charitable intentions, and the estate planning goals for wealth transfer to heirs. Different strategies are optimal in different circumstances. A founder who needs immediate liquidity may prioritize a PVF or a GRAT-and-sell strategy. A founder with strong charitable inclinations may find that a CRT is the most tax-efficient approach. A founder with a very long time horizon and no immediate liquidity need may prefer the exchange fund as a pure diversification play.

What all of these strategies share is the requirement for planning in advance. Collars, 10b5-1 plans, CRTs, GRATs, and exchange funds all require meaningful lead time to design, document, and implement. A founder who calls their attorney the week after the lockup expires, having not yet begun any planning, will find that many of the most powerful strategies require weeks or months to put in place. The ideal time to plan is during the lockup period itself — when trading is restricted and there is time to think carefully, model the alternatives, and build out the strategy before the founder’s ability to act is restored.