Dealing with company buyouts – Part 6: Tax & Estate

Mergers and acquisitions are a common business strategy and often result in a realignment of talent among mid- and upper-tier executives. Many jobs are eliminated, and severance packages are offered. If your company has recently been acquired or will merge with another company, it’s wise to consider taking immediate action to preserve the compensation you have earned. In addition, it makes sense to develop a strategy designed to strengthen your financial future.

In our six-part series on the potential impact of a company buyout, we’ll discuss several important issues related to your finances.

In this final blog of the series, we review some key considerations with regard to tax and estate planning.

Tax planning tips

When a merger or acquisition of your company happens, your money will likely be on the move. It often results in an acceleration of income, given that stock plans are paying out, deferred compensation is being liquidated, and severance pay and other non-qualified pension plans are coming due.

Here are some important steps to consider with the aim of helping minimize your taxes:

Contribute the maximum allowable amount to your 401(k) plan before your termination date. This move will help reduce income taxes in the year of the merger or acquisition. If you cannot contribute the maximum amount under the old employer’s plan, make certain to contribute the maximum amount when you combine plans offered by the old employer and a new one.

If you participate in a Health Savings Account, think about contributing the maximum amount if you choose a high-deductible plan. For the prior tax year, contributions may be made until April 15 of the following year (e.g., you’d have until April 15, 2024, to contribute for the 2023 tax year). This means you don’t need to make all these contributions before leaving the job or before the current year ends. If you’re not in a high-deductible plan for the entire year, your contribution limit will be pro-rated.

Defer taking capital gains in your taxable investment portfolio in the same year you’re receiving severance or other large payouts, and also harvest capital losses to help offset capital gains you may have incurred earlier in the year.

Also, review opportunities to qualify for state tax credits with respect to special programs. For example, in the state of Georgia, executives can purchase film credits to help reduce the state income tax burden.

For executives who make charitable contributions, consider setting up a Donor-Advised Fund (DAF). This type of account enables people to contribute a large amount of money in one year to help fund charitable gifts for several years. You can deduct the entire amount given to charity in the year your contribution is made, which will reduce your tax bill. Appreciated company stock is often a great tool to fund a DAF since when the stock is liquidated inside the DAF, no capital gain taxes are due.¹

If your financial condition is sound—especially after receiving stock options and other payouts—it may be a good time to help out family members in need. Any person can gift up to $17,000 (or $34,000 for married couples) to an unlimited number of people each year without the need to file a gift tax return. Another favorable gifting strategy is to pay someone else’s medical or tuition bills directly to that institution. The law allows any person to contribute an unlimited amount of money under the gift tax law.²

Last but not least, also consider contributing to your child’s or grandchild’s 529 college education savings plan, which may result in a break on your state taxes. These plans offer tax-free growth if the money is used for qualified education expenses and could be a good use of cash.³

Estate planning tips

While we think having a legal will and a plan for your assets after you die is critically important, this tends to be the top area that our new clients overlook. Perhaps you have a will, but it’s 20 years old and hasn’t been amended to reflect changing circumstances. Or, you simply never got around to addressing your estate planning needs. Don’t be embarrassed by this because it’s quite common. If you have a gap between jobs, use this time to meet with an estate planning lawyer to draw up a will or update your current estate plan.

We believe every adult needs at least a basic will, financial power of attorney and healthcare power of attorney. If you have children age 18 or older, they also need these documents, as they’re recognized as legal adults. You don’t have the same rights to speak for them as you did when they were minors. Trusts are also a common estate planning technique our clients may use to help control and protect the inheritance for their children or other family members.

While you may have set up beneficiaries for a variety of plans—401(k), group life insurance, deferred compensation and pension—we often observe that these designations are not aligned with a person’s will or trust language. It’s critical that beneficiary designations be coordinated with your estate plan, as these types of assets pass outside of your will.⁴ If you’re leaving your company, then your insurance and retirement plans might change, pay out or disappear altogether. This is a great reason to meet with an estate attorney to update your estate plan. In addition, significant changes to how retirement plans pass to children or other heirs may have consequences pertaining to cash flow and income tax. When tax laws change, it’s a great prompt to revisit and potentially revise your will and trust documents.

Finally, if you relocate to a new state for a new job, update your estate plan to meet the new state’s laws. Each state has its own set of rules and standard templates for power of attorney documents.

We’re ready to support you

To make wise decisions when facing a corporate restructuring, we believe you need to understand all the aspects of how this significant change may impact your finances now and in the future. Our team has the experience and expertise to develop your personal strategy, helping you make appropriate moves regarding your separation or transition package and, more importantly, gain clear insights into the potential impact on your overall financial well-being.

Other topics in this series:

• Severance, deferred compensation, investments
• 401(k) and Supplemental 401(k)
• Stock options and restricted stock
• Pension plans
• Insurance planning

¹ https://www.morningstar.com/articles/1039795/pros-and-cons-of-donor-advised-funds
² https://www.kiplinger.com/taxes/gift-tax-exclusion
³ https://www.investopedia.com/terms/1/529plan.asp
⁴ https://www.moneysense.ca/save/financial-planning/estate-planning-investment-beneficiaries

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