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Planning for a Liquidity Event

If you are in the enviable position of having years of hard work pay off with an upcoming liquidity event, there is a lot to prepare for before the liquidity event itself. At that point, it is more important than ever to have a thoughtful financial plan that will build a solid foundation to meet your long-term financial and personal objectives. Your financial plan should be as unique as your fingerprint, custom to your vision and goals in order to support growth and protect assets to ensure financial success now and into the future.

In anticipation of a forthcoming liquidity event, here are a few actions to consider in liquidity planning:

Consider Income and Estate Tax Strategies Around Concentrated Positions

Concentrated stock positions with significant appreciation potential make excellent wealth transfer candidates, saving gift and estate taxes. Additionally, with advance planning, it is possible to eliminate state income tax on a future sale of concentrated stock.

Before embarking on any strategy, it is important to consider the amount of:

    • Assets you will want to retain to maintain your lifestyle
    • Control you are willing to hand to others
    • Complexity you are willing to accept
    • Flexibility needed for an unknown future

Below is a brief summary of potential strategies to consider. As with most financial planning, the earlier you embark on it, the more effective it usually is.

Income and Estate Tax Strategies around Concentrated Positions Potential Strategies

Leverage the Benefits of Qualified Small Business Stock

There are extremely beneficial tax rules related to not recognizing tax on gains from Qualified Small Business Stock (QSBS). If you own QSBS (or think you have stock that might one day be QSBS), it is important to make sure you have the appropriate documentation – the earlier the better!

First, QSBS is defined as follows:

    • Stock bought/earned directly from a company (not on a secondary market)
    • Stock held for more than 5 years
    • Stock in a C Corporation (not an LLC, S Corp, or Partnership)
    • Stock purchased when the company’s gross assets were <$50m and >80% of those assets were being used in an active trade or business

If you have stock that meets QSBS requirements, then you can shield up to $10m (or 10x your basis, whichever is greater) of capital gains from taxes. This $10m of tax-free gains can be multiplied if the stock is owned in more than one taxpaying entity.

Ensure You Have Basic Estate Documents

Having basic estate documents is important no matter how much money you have. That said, as wealth grows, the financial stakes are higher if something happens to you and you don’t have the appropriate documents in place.

Power of Attorney

This document appoints a trusted family member, friend, or advisor as your “attorney-in-fact” to handle financial items on your behalf, if needed. This can include signing tax returns, depositing checks, handling banking/credit accounts, etc. The document can be structured as “springing,” which means it would only go into effect if you became incapacitated, or “durable,” which means it is effective immediately. Either way, it is crucial that you trust the person you appoint in this document as they will have full financial authority over your assets.

Health Care Proxy with a HIPAA Provision

A Health Care Proxy appoints a trusted family member or friend to make medical decisions on your behalf if you are unable. If it includes a Living Will, it can also indicate your preferences on treatment in various circumstances, but the ultimate decision is left in the agent’s hands.

Last Will and Testament

The Last Will and Testament accomplishes a number of things:

    1. It appoints an executor (also called a personal representative) to handle the administration of the assets of your estate at your death.
    2. It states what should be done with your assets at your death. This can include naming possessions with sentimental significance that you want to leave to someone special. Often, the Will instructs that all assets be sent to your revocable trust, which contains the details about the ultimate disposition of your estate (more on this below).
    3. If you have minor children, it names who should be responsible for them in your stead.

The consequences of not having a will are serious; your resident state’s intestate laws will dictate where your assets go (typically outright to your spouse, else your children, else your parents/siblings).

Revocable Trust

Your Will eventually becomes a public document once it is submitted to the Probate Court. For privacy, many people create a Revocable Trust and either own assets in that trust during their lives or have their Will direct all their assets to this trust at their death. The Revocable Trust contains the details of who should get what and how, which is something that most people want to keep private. As its name indicates, a Revocable Trust can be changed/revoked at any time during your life. Its terms can be customized to meet your family’s specific needs and circumstances.

hand holding small white clockA liquidity event is a huge milestone in the lifecycle of your business and in your personal life. By the time the liquidity event has occurred, it may be too late to take advantage of many tax minimization opportunities. Make sure you engage advisors early in anticipation of a future possible liquidity event. Early liquidity planning is paramount in preserving and protecting the wealth you’ve worked hard to earn.


Please contact us if you would like to talk more about your unique situation and how we can help you reach your goals.




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