Mergers and acquisitions (M&As) are alive and well. While M&A activity may not be as hot as it was in 2021, it’s still an active market with significant deal volume completed in the first half of 2022 and looming deals on the horizon. This is reinforced by industry experts who note that “Some of the same forces creating market uncertainty—the lingering pandemic and geopolitical turmoil—also are driving dealmaking imperatives.”
At Fidelity Charitable, we’re working with many advisors counseling clients about the second half of the year and prioritizing charitable planning as they contemplate what-if M&A scenarios.
Just like your public stock portfolio, or your crypto holdings, what you own today may not be as appreciated as it was earlier this year; however, it might very well still hold some gain since you invested initially. Following your investments—and their industries—and being proactive in your planning to ensure that you are ready when your portfolio becomes a possible target of an M&A event, is itself a smart strategy.
You’ve likely observed the M&A buzz with all the news around a potential sale of Twitter to Elon Musk and the back-and-forth discussions among shareholders of Spirit Airlines, Frontier, and JetBlue Airways. If you own stock in a target company, or any company involved in a merger or acquisition, a potential forced capital gain and/or appreciation may come your way as a result of the deal. But it’s important not to forget about the accompanying tax liability due to the recognition of capital gains, especially with all-cash deals.
While many shareholders often overlook charitable giving opportunities when learning of a merger or acquisition, donating the stock to a charity of your choice may present the best opportunity across your financial portfolio to potentially reduce your tax liability. But timing is critical. The path to charitable giving success amid an active M&A environment requires you to carefully consider charitable opportunities to unlock your hard-earned value, rather than have unexpected tax consequences erode the investment.
For example, let’s say it was announced in June 2022 that Company A is being acquired by Company B for $100 per share if approved by shareholders in October 2022. The shares you own in Company A have significantly increased in value from when you originally purchased them for $20 per share over a year ago. As a charitable-minded investor, if you plan to donate your appreciated stock before October to a charity, you not only can meet your charitable goal, but may also eliminate the capital gains tax.
So, are you prepared to make strategic philanthropic decisions amid fast-moving M&A announcements? Consider the following M&A checklist to guide you:
Whether you are an insider, employee, founder, or investor—your advisor can provide more detail about charitable offset strategies and model the impact depending on the totality of your specific portfolio, including public and private stock, as well as cash and cryptocurrencies.
If you are an affiliate of the company, it’s crucial to not run afoul of insider trading violations. “In general, insiders are subject to restrictions on transfer prior to the closing of the M&A transaction. A charity with expertise in this area can best engage with company counsel to navigate the voting issues and ensure compliance and a successful outcome,” shared Amy Grossman, vice president, Complex Assets Group at Fidelity Charitable.
Without proper planning, some M&A deals could result in a 100% recognition of capital gains. If you learn of an upcoming transaction before the shareholder vote, you have the option to donate the stock subject to the transaction to a charity of your choice. You may be eligible for a fair market value tax deduction and may not be subject to the capital gains tax. It is very important to consult your tax advisor before employing this tactic.
However, if you consider this strategy after the transaction is complete, all is not lost. You still have the option to potentially offset the tax consequences by making a charitable donation with cash or an asset from your financial portfolio by December 31, 2022.
With unexpected income resulting from an M&A event, a compelling alternative to giving directly to one or more charities after the event with after-tax giving is to leverage a donor-advised fund (DAF). A DAF is a program sponsored by a public charity that allows you to make an irrevocable charitable contribution of the stock before the event. Doing so gives you an opportunity to take advantage of an immediate tax benefit by claiming an income tax deduction generally equal to the fair market value of the donation. You can then easily recommend grants to multiple charities over time.
Will you experience a significant capital gain from an upcoming M&A event? Prepare now to proactively approach this time-sensitive opportunity to potentially reduce your tax liability and, at the same time, support your favorite charitable causes for today and tomorrow—a win-win solution, particularly in today’s unpredictable market.
The tax information provided is general and educational in nature, and should not be construed as legal or tax advice. Fidelity Charitable does not provide legal or tax advice.
Head of Fundraising
Karla Valas leads fundraising for Fidelity Charitable, the nation’s largest grantmaker. The expertise from her team of Charitable Planning Consultants helps advisors and companies have more sophisticated financial planning conversations that incorporate charitable strategies, such as donor-advised funds. Ms. Valas has expertise in complex assets and previously led a team of attorneys who facilitate thousands of charitable donations of appreciated private company stock and other nonpublic assets annually. She a B.A. from Mount Holyoke College, a J.D. from New England Law and an LL.M. in Taxation from Boston University School of Law. Ms. Valas is admitted to the bar in New York State and the Commonwealth of Massachusetts.
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