You come home in early evening, open the front door, and you are met by fifty people singing “Happy Birthday” as lights flash from their cameras. This is a pleasant surprise—at least if you weren’t hoping to spend a quiet evening ignoring the fact that you are another year older.
It is early April, and you receive a telephone call from the accountant who prepares your income-tax return. She alerts you to the fact that your withholdings and estimated tax payments were insufficient and that you will owe an additional $24,000 in taxes when you file your return next week. That is the same amount that you had set aside for a European vacation. This surprise is most unwelcome.
A certain company is attempting a purchase of all of the shares of a company whose stock you hold, and you and other shareholders have received tender offers. The tender offers have driven up the price, and you are hoping that the price will go still higher. Let’s say that either you agree to tender your shares or certain conditions have been met and the board of directors has approved the sale, in which case you have no choice but to exchange your shares for cash. However, you have not yet received any payment. After discussing the sale with your financial and legal advisors, you realize that, due to the low cost basis of your stock, you will be facing a very significant tax on the capital gain. Then you recall an article explaining how an investor can transfer appreciated stock to a charitable remainder trust and the capital gain would not be taxed to the owner when the property is transferred to the trust nor subsequently when it is sold by the trust—so the entire sales proceeds could be invested to generate income.
You breathe a sigh of relief and call us about your possible interest in a charitable remainder trust funded with stock to ask if the trust can be established quickly because there is a small window of time to complete the transaction. Upon an alert from our representative, you consult your advisors again and learn that, unfortunately, the window has closed. Because you are now under an obligation to sell your shares for cash, you will be taxed on the capital gain even if the shares are transferred before you actually receive the cash payment. The deduction you will receive will mitigate but not eliminate the tax on the gain. This, too, is quite an unwelcome surprise.
How can you avoid such unwelcome surprises regarding taxes? One answer is to take steps before year-end to reduce taxable income. If you are over the age of 70½ and have an IRA, you could authorize your IRA administrator to transfer money from your IRA directly to us—and the amount transferred would not be included in taxable income but would count towards your required distribution. Whatever your age, charitable contributions will reduce taxable income if you itemize. If you need income from your assets, there are life-income plans, such as a charitable remainder trust, whereby you can receive and perhaps increase income and also get a charitable deduction.
The strategy in the above example about transferring the shares to a charitable remainder trust was sound, but the timing was wrong. If you had not waited so long and had transferred the shares before you were contractually obligated to do so, the capital gain would indeed not have been taxed on the transfer and the sale.
Thus, if you are contemplating or facing a possible sale of appreciated securities or if you don’t want another unwelcome surprise in April, contact us—and we can discuss ways to reduce taxes, support our mission, and perhaps preserve those vacation plans.
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