How to Get More Income from Highly Appreciated Stocks

Question:  I am 74 years old with a portfolio of approximately $2.0 million consisting of blue-chip stocks, bought over 40 years ago, yielding a cash flow that is about two-thirds of the cash flow I need.  What is the best way to increase my cash flow with the minimum of tax?  I have come up with the idea of borrowing against the principal, thus also reducing my estate for capital gains taxes.  Is this a sound answer?

Answer:  As folks live longer and their stocks increase in value, retirees look for ways to increase their income to maintain their standard of living and sometimes provide cash gifts and support to their children and grandchildren. I think that at every investment conference I have attended in the past few years, one of the main presentations centered around how to provide income in our current low-income environment and still protect against risk. 

I’ll discuss three ways to increase your income.  These are: (1) sell some of your stocks, (2) borrow against them, and (3) use a bona fide charitable gifting technique.

1) Sell Stocks

You may not want to sell any of your highly appreciated stocks because you want to keep the dividends and defer the capital gains tax.  You know that if you defer those capital gains until you die, your beneficiaries will enjoy a new, stepped-up cost basis, eliminating that tax.  (Not true if the stocks are in a bypass (aka exemption) trust.) 

You should ask your tax professional what tax you would have to pay on long-term capital gains.  You might be pleasantly surprised.  Capital gains tax depends on your income.  Although the maximum rate is 20% (not including the 3.8% Net Investment Income Tax), most taxpayers actually have a 0% to 15% federal tax rate on their long-term capital gains.

2) Borrow Against Your Stocks

For most retirees, this option won’t make financial sense.  The interest rate you pay will probably be twice the rate of dividends that you are earning, meaning you are losing money.  And if you die with the loan still in force, your estate will have to pay it off.  Borrowing with stocks as security, usually done through your broker using a margin account, is okay for a short-term loan, but never a good idea for providing income over a long period of time. And the IRS won’t let you deduct the margin interest unless you are using the loan proceeds to buy investments. 

3) Charitable Remainder Trust (CRT)

An excellent way to provide income from appreciated stocks and avoid capital gains tax is to set up a Charitable Remainder Trust (CRT); a CRT is an irrevocable trust.  You give your stock to the CRT.  The CRT sells the stock, pays no tax, and pays you an annual income.  When you die, the money in the CRT goes to charity. 

The advantages of the CRT are: (1) a higher annual income then you can get now, (2) an immediate tax deduction for the gift, (3) the removal of the stock from your estate for estate tax purposes, and (4) the gratification of giving to the charity or charities of your choice while you are still alive. Ask your attorney, your favorite charity, or your local community foundation for more information.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to