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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
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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