Avoiding the Capital Gain Hit of Stock Mergers

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.

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.

Contact us to find answers to any of your other charitable planning questions.

 *Example of combined federal and state capital gain tax rate

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