5 Ways to Minimize Taxes After a Liquidity Event




By Zach Bainter

07/31/2018

Your company has just been acquired or IPOed and you are holding a lot of equity. You have vested Incentive Stock Options (ISOs), unvested Non-Qualified Stock Options (NSOs), and some actual stock. Congratulations, you had a financial windfall! Now what? Before you start thinking about that new house or investing the proceeds, you need to figure out what taxes you will owe. Here are a few ways to help minimize that tax burden in the year of your liquidity event.

Maximize your 401(k) pre-tax contribution of $18,500, or $24,500 if you are aged 50 or older. This will lower your taxable income for the year. Also, when your income tax bracket is higher, there is an added benefit to doing this since there is a greater deduction as a result of a higher tax bracket. If your liquidity event is happening at the end of the year leaving you with less pay periods to do this, speak with HR and ask to maximize your deferral and minimize your net pay. Do what you can to get that max deduction.

Feeling charitably inclined? Consider a Donor Advised Fund (DAF). These are wonderful investing vehicles that can be used to maximize charitable giving. Here is how it works: you make a generous donation to your personal DAF in the year you have the windfall (Note: appreciated stock can also be donated). In other words, make the upcoming years’ contributions all at once to get a greater tax benefit. Keep in mind this is irrevocable, so this must be used for charitable donations. You still guide the investment decisions and the money grows tax-free to you. Eventually, when you are ready to donate to an approved charity in the future, you can make grant requests from the fund.

Look to delay other large capital gain sales. You might have a taxable investment account or additional stock shares that are vesting. Consider delaying these sales to another tax year when you might not have to pay the net investment income tax and will likely have a lower marginal tax rate.

Take company shares if given the chance. If you are given the opportunity to receive the acquiring company’s shares as part of the deal, consider taking some. This will normally lead to preferential tax treatment down the road. This should only be done as part of an overall investment strategy which may include hedging if you plan to hold the shares while waiting for long-term capital gains.

Consider starting that business that you have a great idea for. Many great companies have started in the wake of another company’s liquidity event. If the business seems viable after consulting with your team (advisor, attorney, accountant), look to use the startup costs as a deduction. Just make sure you speak with your tax advisor every step of the way on this one.


Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. Gerber Kawasaki and Gerber Kawasaki Wealth and Investment Management are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.

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