Amplified Giving

Avoiding the Capital Gain Hit of Stock Mergers

[fa icon="calendar"] February 3, 2016 at 11:00 AM / by Renaissance

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As Republican and Democratic Presidential nominees debate who is at fault for the rash of corporate inversions, financial advisors are left to share with their clients news of another pending M&A.  Last week, Johnson Controls announced they expect to merge with Tyco, an Ireland-based company, with Johnson Controls shareholders set to receive $3.9 billion in cash, with 100% capital gain recognition.

Instead of swallowing an average 25% capital gain tax rate* on the required sale, stock mergers present ideal charitable gift opportunities.  Let’s take a look at a few examples:

Endowed Giving through a Donor-Advised Fund

Harry & Susan own $100,000 of Johnson Controls stock they bought for $25,000 several years ago.  The all-cash merger with Tyco will force Harry & Susan to sell their stock triggering a capital gain tax of $18,750.  By donating all, or any portion of the stock, to a Donor-Advised Fund, Harry & Susan are able to eliminate (or at least decrease) their capital gain tax and they will receive a charitable deduction on the amount of stock donated.  Additionally, by utilizing a DAF Harry & Susan are able to spread their giving out over many years.  

Learn more about Harry & Susan's DAF

Income Stream

For Joel & Bridget, their investment portfolio includes $500,000 of Johnson Controls stock with a $100,000 cost basis.  The all-cash merger will trigger a capital gain tax of $100,000 for the 60-year old couple.  By moving the stock to a 6% Charitable Remainder Trust, Joel & Bridget can realize a before-tax lifetime cash flow of $1.164 million, an income tax deduction of $107,000, defer capital gains and fund nearly $900,000 in future charitable gifts.

For advisors and clients alike, it is imperative to understand what the real value of your portfolio is when presented with a stock merger.  We haven’t seen the last of corporate inversions so remember charitable gifts when confronted with a capital gain tax implication.  Mergers & acquisitions are a great way to involve charity and minimize capital gain tax.

Full details on Joel & Bridget's CRT


Our consulting team at Renaissance can provide illustrations to detail gift options for clients.   Reach out day!

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 *Example of combined federal and state capital gain tax rate

Topics: Charitable Giving