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The Charitable Giving Side of a Business IPO or Acquisition

Posted by Gregory A. Van Slyke, FSA, CFA®, CFP®

What to Consider to make a Business Change an Opportunity for Giving

Suppose you have a low basis concentrated position held more than a year in a company approaching a transaction. If you would like to minimize tax drag and are charitably inclined, you will want to avoid taxes on some of your unrealized gain by gifting shares, rather than proceeds, to charity. The charity will then effect or participate in the sale. The concept is simple but there are plenty of details to consider.

Timing the Gift and Sale of Shares

Typically, you want the same timing for both the gift to charity and the sale of the stock to maximize both your deduction value and any sale price. In practice, however, synchronizing the two may be challenging and could sometimes be disadvantageous.

Perhaps your business is headed toward an initial public offering (IPO) or an acquisition for stock by a public company.  One option is to make share gifts to charity after the deal is complete. You will have daily price visibility, but will likely face other constraints:

What if your company’s IPO will allow investor sales and you would rather not take the price risk that comes with waiting out the lockup period? The capitalization table is usually frozen before the road show and pricing meeting. If you want a charity to be eligible to sell at the IPO, you face making a gift before the price is set and even before the final decision to go public is made.

An acquisition for cash will set the sale timing for you. But the gift to a charitable entity needs to occur early enough, before shareholder and other approvals have been obtained, to avoid the risk of treatment as a deemed sale prior to the gift. This means taking some risk that the deal could fall through after you have already made the gift.

How to Time When the Charity Gets the Money

At Lake Street, many of our families use a charitable conduit entity, such as a donor advised fund or a private foundation. With either, you can optimize the timing of your deduction and sale but choose a later date for the ultimate charity to receive cash. Each entity type has advantages and disadvantages with respect to control, privacy, costs, flexibility, taxation, administrative ease, and other items. Working with each family and their advisory team, we help navigate the pros and cons. Sometimes it even makes sense to have both.

One key distinction between donor advised funds and private foundations involves the value applied to the charitable deduction. Donor advised funds are public charities and the charitable deduction for gifts to them is set at fair market value. The charitable deduction for gifts of non-publicly traded stock to private foundations is limited to basis, generally eliminating private foundations from consideration unless the stock is public and not restricted.

What if you want a lifetime cash flow stream from the proceeds? A charitable remainder trust (CRT) may be the perfect option. After you, or you and your spouse, have passed, trust assets can go to charity, including a foundation or donor advised fund. While the gain on the sale and subsequent investment activity is taxable, taxes can be deferred over many years.

Additional Tax Considerations

The above is just a brief flyover on charitable timing. There are many more details that may be relevant, a few of which are touched on below.

From this list of items, it is clear that your advisory team, including your tax and estate advisors, should be involved early and often.

Is Your Business Going For an IPO or Being Acquired?

Posted by Gregory A. Van Slyke, FSA, CFA®, CFP®

Here Are 3 Things You Shouldn’t Ignore If Your Business is Making an IPO or Being Acquired

If your business is making an Initial Public Offering (IPO) or is about to undergo an acquisition, do you know what you should be focused on? The answer might seem simple–you focus on getting the deal done, on getting attractive terms, and working with the right banker or buyer.

Absolutely focus on the deal. But there are a few other areas you shouldn’t ignore that will help you through the deal with fewer headaches and surprises.

Enlist Your Advisor Out of the Gate for Optimal IPO or Acquisition Guidance

Your family financial advisor can act as a general contractor of sorts. They can apply their defined knowledge of your priorities and objectives, and they can give you guidance and information to your legal and tax counsel.

With the added support from your advisor, your outside team of area experts (CPA, Estate Attorney, etc.) can do what they do best: navigate the myriad of technical choices available to you.

Here are the 3 key items your advisor and wealth management team should be attentive to:

1. Income Taxes

Even if the IPO or acquisition deal is stock-for-stock, there is no time like the present to make sure your cost basis records are accurate.

At Lake Street Advisors, we typically see clarity of stock ownership, but less so for basis, and recordkeeping from the early days may be sparse. Often, shares were obtained in various ways over the years, and the company went through multiple re-capitalizations. Its tax status may have evolved as well, perhaps starting as a pass-through before evolving to a C corp.

Shares may also have a different basis under the Alternative Minimum Tax (AMT), often due to the acquisition of shares via option exercise. The AMT basis for incentive stock option (ISO) shares will be different from their regular tax basis if the shares were held longer than a year after exercise.

Another question is whether any shares qualify for Qualified Small Business Stock (QSBS) treatment.  The rules are complex, but worth checking as you can possibly avoid federal tax on a portion of your gains.

2. Share Titling

Are shares titled where you want them? Does it make sense to move some before the event occurs? If tax avoidance or asset protection is important to you, act before the price appreciates.

Funding one or more irrevocable trusts before the transaction usually makes sense. Considering the purpose and beneficiaries of each trust, some combination of your $11,180,000 estate tax and generation-skipping tax (GST) exemptions may be applied ($22,360,000 for married couples). Your attorney can advise you regarding an appropriate funding technique, whether it be a straight gift, a grantor retained annuity trust (GRAT), a sale to a grantor trust, or another.

Transfers will be done at fair market value (FMV), which will likely increase as the closing date approaches and the deal becomes more certain. A valuation by a qualified appraiser will be necessary to support the values used.

One key consideration is the use of irrevocable grantor trusts. They are powerful tools for reducing your ultimate estate tax. These trusts are not yours for estate purposes, so no estate tax applies–but they are yours for income tax purposes. Care must be taken regarding how many shares trusts own while they have grantor income tax status. When a gain in the trust is triggered, you get the tax bill.

Perhaps you got out in front of all of this, and you already have shares in one or more irrevocable trusts. It’s still worth another look. Should GST exemptions be allocated to any of the trusts now? Do any trusts have grantor income tax status and will the post-tax math be acceptable? Are trust provisions still appropriate considering the new expected value of the shares? It’s better to have a plan to deal with these important questions before the deal goes through.

Timing is of the essence on all these items. Have a fully-informed advisory team in place and get them engaged well before the transaction occurs.

3. Sale Proceeds – Engage a Buy Side Advisor for Managing Your New Found Wealth 

Before you know it, the deal will happen and cash will be hitting your account(s). Don’t let inertia make decisions for you. We respectfully suspect that your banker was handsomely paid and you don’t owe him or her your investment business.

Depending on the structure of the IPO or acquisition, as well as your outlook for the stock, cash may come in over a period, perhaps years. Shares retained may be subject to lock-ups and restrictions that need to be managed through. Your investment strategy for the sales proceeds should take into account the evolving size and expected performance characteristics of any concentrated position still held.

For significant business changes like an IPO or acquisition, you’ll find involving your wealth advisor and others with whom you consult will help streamline the deal and give you less to worry about. You will also have the benefit of knowing all options available to you. For example, there are many more opportunities beyond these 3 considerations, like charitable giving, that can factor in to your decision-making.

We suggest you engage a buy side advisor, not a sell side advisor. Find a Registered Investment Advisor (RIA), like Lake Street Advisors, who specializes in working with families of financial size and complexity like yours. These firms have a legal obligation to manage your portfolio under a fiduciary standard.

For more information about how Lake Street Advisors can work with you and plan and coordinate with your other advisors to guide your business through an IPO or acquisition, contact us today at