Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Anticipating a Merger? Tax Planning Strategies You Should Consider Now
Published Date : October 25, 2016
In June of this year, Microsoft announced plans to acquire LinkedIn for $196 per share in an all cash deal. This is great news for LinkedIn shareholders and this is only one of 32,203 M & A deals announced during 2016 which total value estimated at $3.6 trillion¹. The shareholders of LinkedIn or many other companies on the cusp of acquisition – founders and early investors particularly – are no doubt beyond thrilled at their upcoming liquidity event. They are also in a unique position in terms of tax planning. The deal has been announced and the sale price is set, so shareholders are able to get a clear picture of their impending tax liability and get to work minimizing it.
If you’re one of the lucky ones this year or in the future, what can you do?
- Take action before the deal closes
In order to avoid realizing the gain, you need to take action with your stock before the deal closes. While charitable donations can be made at any time, you’ll get the biggest bang for your buck by avoiding the gain entirely and getting the benefit of the charitable deduction.
- Take advantage of Qualified Small Business Stock (QSBS) Rules
If you’re a founder or an early investor in a company with stock purchased after September 27, 2010, you can exclude 100% of the gain (limited to the greater of $10 million or 20 times your basis) on QSBS after a 5 year holding period. The gain on stock acquired earlier is limited to 75% or 50% depending on acquisition date. Be sure to raise this issue with your tax preparer if you think it could apply to you, so that you can get clear on the tax treatment of your particular shares.
- Establish a Donor Advised Fund (DAF)
Donor Advised Funds are easy to establish and provide for an immediate tax deduction in the year they are established. With low fees and no annual gifting requirements, they can buy the donor time to research appropriate charities that support their goals. DAF’s can be completely self-directed or if opened at a Community Foundation, can provide the donor with research and assistance on particular charitable themes. Additionally, a successor trustee can be designated to continue the fund at the donor’s passing.
- Establish a Charitable Remainder Trust (CRT)
A CRT is an irrevocable trust that provides income to a non-charitable beneficiary during their lifetime with the remainder going to a charity at their death. Like a DAF, a CRT provides an immediate tax deduction. Relatively easy to establish and low-cost, they can be an attractive solution for those who want to be charitable but are concerned about income.
- Make direct stock gifts
Like funding a DAF or a CRT, making stock gifts directly to qualifying 501(c) 3 organizations will allow you to both avoid the gain and receive the charitable deduction. It’s free and easy to boot.
Stock gifts can also be made to non-charity beneficiaries like children or anyone else you choose. Just remember that your cost basis in the gifted stock becomes the recipient’s cost basis, so this method simply shifts the tax burden away from you to someone else. Remember too that gifts to non-charities will eat-up some of your lifetime tax exemption amount of $5.43 million if they exceed $14,000 year or $28,000 for married couples.
While each of the planning opportunities presented here require a deeper dive to confirm that they align appropriately with your particular situation and goals, they hopefully provide some inspiration for those looking to reduce their tax bill – either in the face a merger or another significant liquidity event.
1 Bloomberg
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