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IPOs tax planning can be exciting for pretty much everyone involved, from the founders and original investors to retail investors looking to jump on board today. But an IPO is an especially thrilling time for the company’s employees, no matter when they joined the company — windfalls can do that.
If you’ve made it this far, most of the hard work is behind you and now it’s time for your reward, but there are a few common pain points, and they can be significant. You found this article, so you’ve probably spent some time searching the web for solutions to those issues, and you’ve likely read countless articles on how to “prepare for an IPO.” Typical topics range from the mundane like “Prepare for change!” to the informational “Understand how many options/shares you own,” “When can I sell?” and “what is lock-up” to, maybe most consequential of all, “Are my shares eligible for the Qualified Small Business Stock Exemption (QSBS)?”
We’ll let you find those answers elsewhere. We’ll focus instead on our bread and butter: the key tactical approaches you can take to maximize the hard-earned gains coming your way and, in particular, leveraging tax deferral structures with Charitable Trusts.
An IPO is an exciting win — seeing your hard work pay off and for the potential financial windfall. At the same time, though, you want to reduce your up-front IPO taxes. And who wouldn’t? You’re at the finish line and want to keep as much of your hard-earned gains as possible, and rightfully so.
We can help. Whether you’re still holding your shares (so your gains are “unrealized”) or you’ve already sold (and “realized” those gains), there’s a tax strategy available:
It pays to plan ahead. If you have unrealized gains at or after your IPO, it’s possible to delay or eliminate your expected tax obligation and realize significant returns with a Charitable Remainder Trust (CRT). A CRT allows you (the holder of the shares) to gift vested and exercised shares to a trust and pay no taxes when you sell. (If that seems too good to be true, we suggest that you check out our foundational post on how Charitable Remainder Trusts work).
Assumptions for this example:
If you sell your shares w/o a trust:
Summary of Benefits:
The upshot:
You’ll be able to avoid taxes on the sale of the asset as long as you set up the trust and transfer the assets before you sell, giving you more assets to invest and grow! This can happen before or after the company has completed its IPO!
So you’ve already sold your shares? First and foremost, congrats are in order! You’ve likely had a major windfall and now are taking the steps to figure out how to reduce your tax exposure. The additional good news is that it’s not too late. With a Charitable Lead Trust (CLT), you still have the opportunity to reduce that tax bill and realize significant additional returns. A Charitable Lead Trust allows you to gift any asset to the trust, send a small donation to a charity every year, and receive a massive up-front charitable tax deduction. (If you’re not familiar with CLTs, take a look at our foundational post on how Charitable Lead Trusts work.)
Assumptions for this example:
If you sell your shares w/o a trust:
Summary of Benefits:
This strategy tends to work best for individuals who are not concerned about liquidity. This is because, unlike the Charitable Remainder Trust, the Charitable Lead Trust cannot make regular distributions to the individual setting up the trust. Instead, the person setting up the trust receives the total amount in the trust at the end of the term (which usually runs for between 20 and 30 years). So this tends to feel more like an especially well funded retirement account that has real tax benefits, kind of like an IRA, but with significant charitable giving built in.
The upshot:
You can set up a Charitable Lead Trust at any point during the year when you realize your big gain, and the structure will reduce your taxable income in that year. It’s important to make sure you’ve done this in the year you’re experiencing the gain, to make sure you can apply the charitable deduction to that income spike.
Setting up a Charitable Trust will allow you to defer your taxes and maximize your gains from an IPO. You’ve already picked a winner. Now it’s time to protect and grow those gains!
Read our next post on how to use a Charitable Remainder Trust to sell real estate tax free, evaluate the potential return of investment given your situation with our tax planning calculator, or just schedule a call with our team.
We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.