John G. Youngs,
Partner, CEO
Selling a business, taking a company public, or transferring ownership of a family business can transform your financial picture almost overnight. The months leading up to a liquidity event often present planning opportunities that may not be available afterward. Decisions surrounding taxes, investments, charitable giving, and estate planning can have a significant impact on how much of your wealth you ultimately preserve.
The earlier planning begins, the more flexibility you will have.
Liquidity Events Come in Many Forms
A liquidity event is any transaction that converts an illiquid asset into cash or marketable securities. This may include:
- Selling a privately held business or real estate
- An initial public offering (IPO)
- Selling company stock or restricted stock units (RSUs)
- A family business succession
- A merger or acquisition
- Receiving a significant inheritance
- Receiving a legal award or settlement
Each event has unique financial, tax, and legal considerations, which is why it is important to start planning early.
Build Your Advisory Team
There are valuable planning opportunities available when preparing for the liquidity in advance of the event – and having the right team in place can help guide you and put together a strategy seeking the best long term outcome. Depending on your circumstances, that team may include professionals such as your financial advisor, tax professional, and estate planning attorney.
By coordinating their expertise early in the process, your team may be able to help identify planning considerations, anticipate potential challenges, and develop a more comprehensive strategy before important decisions become time sensitive.
Prepare for the Tax Impact
Taxes are often one of the largest expenses associated with a liquidity event. Depending on the nature of the transaction, you may be subject to federal and state capital gains taxes, ordinary income taxes, the Net Investment Income Tax (NIIT), and other applicable taxes.
Through strategic planning you may be able to create opportunities to:
- Structure the timing of income
- Coordinate stock option exercises
- Consider more favorable entity structures
- Harvest capital losses
- Offset gains through charitable giving
- Evaluate installment sale opportunities
- Coordinate gifting before appreciation occurs
Develop an Investment Strategy Before the Cash Arrives
Receiving a large amount of cash can create its own challenges. You may feel pressure to make immediate decisions, especially after years of focusing primarily on building a business or managing concentrated equity positions.
Work with a financial advisor to develop a long-term financial strategy before the proceeds arrive.
Questions worth considering include:
- How much should remain available for liquidity?
- What level of investment risk is appropriate now?
- How should assets be diversified?
- Will my income need change?
- How should taxable and tax-advantaged assets be coordinated?
Having a disciplined plan in place can often help reduce emotional decision-making during periods of significant financial change.
Consider Charitable Planning Before the Transaction
If philanthropy is part of your legacy, the timing of charitable gifts can significantly affect your tax outcome. Gifting appreciated assets, such as stock or ownership interests, before a liquidity event may help avoid capital gains taxes while potentially qualifying for an income tax charitable deduction.
It’s important to coordinate closely with your advisory team because if a gift is made after a transaction becomes substantially certain, the IRS may still treat you as responsible for the taxable gain under the assignment of income doctrine.¹
Donor-advised funds (DAFs), charitable remainder trusts, qualified charitable distributions (QCDs), or a private family foundation may also be appropriate as part of your tax, estate, and philanthropic planning.
Revisit Your Estate & Legacy Plan
A liquidity event can change both the size and complexity of your estate. This is an ideal time to review your will, account designations, powers of attorney, healthcare directives, business succession documents, and any existing trust structures to ensure they continue to support your needs.
Depending on your goals, strategies such utilizing trusts may help preserve wealth, reduce estate taxes, and support future generations.
Prepare for Your Next Chapter
Planning well ahead of a liquidity event may give you greater flexibility to make informed decisions, preserve more of your wealth, and prepare for the opportunities that follow. The transaction itself may happen on a single day. But the financial decisions surrounding it can influence your family for years to come. Reach out to learn more about how we help our clients before, during, and after liquidity events..
Frequently Asked Questions
How far in advance should I begin planning for a liquidity event?
Planning should begin at least 12 to 24 months before an anticipated transaction whenever possible. Starting early gives your advisory team more flexibility to implement tax, estate, charitable, and business planning strategies before the transaction closes.
Should I review my insurance after a liquidity event?
Yes. A significant increase in wealth can also increase your exposure to potential liability. A liquidity event is a good time to review your asset protection strategy, including umbrella liability insurance, property and casualty coverage, business entity structures, trust planning, personal cybersecurity, and identity theft protection
Should I involve my family in the planning process?
Many affluent families find value in having age-appropriate conversations about wealth, family values, governance, and future responsibilities. Preparing heirs before wealth transfers can often be just as important as the financial planning itself.
Sources
1https://www.waldcompany.com/newsdetail/faq-what-is-assignment-of-income-under-the-tax-law/
The views expressed represent the opinions of Tiller Private Wealth as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
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