Forced Capital Gains
For people who are shareholders of firms such as Aetna, BroadSoft, Buffalo Wild Wings and others, 2017 may have made them victims of a capital gains tax bomb through no fault of their own. These companies were acquired last year as part of the biggest year in history for mergers and acquisitions. These acquisition events create an unintended taxable event for shareholders. A gift to a donor advised fund can offset the tax bite of the acquisition – if timed correctly.
According to data from Thomson Reuters, worldwide, more than 50,000 mergers and acquisition deals took place, worth in excess of $3.5T. More than a quarter of these were in the US. Building on 2017 activity, all signs point to robust activity in 2018, making it a great strategy point to review with your clients on a regular basis that allows them to have a charitable benefit in spite of the Tax Cuts and Jobs Act.
Often an acquisition triggers a severe spike in stock pricing for the company being acquired. An unintended consequence to shareholders of the company being acquired is a capital gains tax bill on all of that growth in value. Even if the shares are exchanged for the newer corporate shares and instead of actually sold, those shareholders are forced into a taxable event. They must pay capital gain taxes on any appreciation in shares they hold in exchanging shares in the “old” firm for shares in the “new” firm. Being able to avoid this capital gains exposure allows them to gain a charitable benefit that has nothing to do with standard deduction thresholds.
This tax bomb can be especially painful for those long-time employees and retirees who have accumulated shares over time at low prices.
One way to defuse the impending tax bomb is to gift the appreciated shares to a charitable cause. The use of a donor advised fund (DAF) can allow affected shareholders to gift their shares into their own donor advised fund.
This benefits donors in the following ways:
- They receive a deduction for the fair market value of the contributed shares (highest available).
- They avoid any capital gains tax on shares exchanged in the inversion.
- They determine charitable beneficiaries on their own convenient timetable and engage their family in their charitable legacy over successive generations.
- They can recommend their trusted advisor to manage investments in their fund on their familiar platform.
For this process to work however, the gifting needs to occur prior to the shareholder vote of approval. Therefore, it is important to act as soon as the impending merger is announced to make sure you get the most significant tax benefits. AEF strongly recommends that you seek qualified tax advice for more specifics on the best time to structure these gifts.
At American Endowment Foundation, we look forward to discussing your circumstances and helping determine the best solution for your specific situation. Contact us or call at 1-888-966-8170 with any further questions.
Note: The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.