Case Study: Donating Low Basis Stock to Reduce Tax Burden

At Innovest, we serve families by creating custom investment solutions that help them meet their objectives and maximize after-tax performance. In order to extend the knowledge that we’ve gained through serving families, we are sharing real life case studies. In this example, we address tax liability after a liquidity event.

Challenge

An ultra-high-net worth family sold a portion of their business, creating a liquidity event. The transaction was lucrative but produced a substantial tax liability for the family. The family sought to minimize their tax bill before the end of the calendar year.

Background

Due to tax considerations, achieving financial objectives for family investors is usually more complicated than for nonprofit investors. It is essential for family investors to work with all their advisors (investment, legal, and tax advisors) to maximize the probability of meeting their investment and philanthropic objectives in a tax-efficient manner.

Solution

Innovest worked closely with the family’s CPA to determine the best way to reduce the family’s tax bill. All holdings in the liquid portfolio were reviewed to determine if there were any losses that could be realized to offset a portion of the taxable gains (i.e. tax-loss harvesting). Upon determining that the majority of the investments had significant long-term investment gains, Innovest explored other avenues to reduce the tax burden on the family, including donating highly appreciated securities to the family’s private foundation while still keeping the overall investment portfolio’s asset allocation in line with the family’s objectives. The analysis showed that the largest gains were in individual large cap U.S. stocks managed in separate accounts, thereby allowing the family to donate specific securities with the largest unrealized gains. Since the gains were long-term in nature, the family could deduct the current market value of the donated securities, subject to certain limits.

End Result

The family donated $5 million of highly appreciated securities to their private foundation, allowing the family to:

• Contribute to their philanthropic objectives

• Reduce their tax bill through donating the securities

• Reduce the number of positions in their liquid portfolio with significant unrealized gains

• Keep the asset allocation of the investment portfolio in line with its target allocation

Innovest earns client trust through custom solutions such as the one above. If you would like to learn more about what Innovest can do for you, contact us today at 303-694-1900.