NEW YORK (TheStreet) -- The following is an actual, real life example of a strategy we're working on for a client. Let's call him Robert.
Robert's father, Fred, worked for Chevron (CVX) (or a company to be later acquired by Chevron) his entire career. Fred accumulated a sizable chunk of Chevron stock in his employer-sponsored plan, which he passed tax-free to his wife, Dottie, when he died several years ago. Today, Dottie is 85 years old and those 10,000 shares of Chevron stock represent her entire investment portfolio. Since Fred passed away, Dottie has been successfully living off Chevron's quarterly dividends.
But recently Dottie's medical costs have risen and she hasn't been able to do as much for her grandkids as she'd like. Those dividends currently amount to about $45,000 annually -- far from a fortune but, in addition to Social Security, it's sufficient income for Dottie to pay her bills.
Robert is handling his mother's affairs and wants to know what, if anything, could be done to generate additional income for Dottie.
The questions we asked Robert:
1) What is the cost basis of the Chevron shares?
The cost basis isn't zero, but it's pretty darn close. Cost basis did step up to market when Fred passed, but unfortunately that was almost 20 years ago so the basis is about $25 per share. With Chevron currently trading around $125, selling any or all of the shares will result in a substantial tax bill. That's not a great option.
2) Is there an emotional attachment to the shares?
You bet there is.
3) Are Dottie's income needs being met?
Yes, though she has recently had to curb her $500 monthly addition to her grandchildren's college funds, her primary interest at this point.
4) Who stands to inherit the shares?
Robert and his two sisters.
The key takeaway is that we don't have a lot of flexibility to add value here. In an ideal world we could diversify away from this concentrated position by selling a portion of the stock over time. The single security risk is substantial, especially in the energy space. But we are largely handcuffed by Dottie's low cost basis, lack of liquidity and her emotional attachment to the investments her husband worked for so many years to acquire.
So what are our options?
Well.....how about options?