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