Mergers and acquisitions (M&A) are alive and well. While M&A activity may not be as hot as it was in 2021, it is still an active market with significant deal volume closed in the first half of 2022 and deals looming on the horizon. This is reinforced by industry experts who note that “Some of the same forces that are creating market uncertainty – the ongoing pandemic and geopolitical unrest – are also driving the imperatives of trading.”
To Fidelity Charitable, we work with many advisors who advise our clients on the second half of the year and prioritize charitable planning as they consider M&A scenarios. Much like your public stock portfolio or your crypto holdings, what you own today may not be as valued as it was earlier this year; however, there may very well still be some gain since you initially invested. Tracking your investments – and their industries – and being proactive in your planning to ensure you are prepared when your portfolio becomes a possible target of an M&A event, is in itself a smart strategy. You’ve probably seen the M&A buzz with all the news around a possible sale of Twitter to Elon Musk and the back and forth between Spirit Airlines shareholders
While many shareholders often overlook charitable giving opportunities when informed of a merger or acquisition, donating stock to a charity of your choice may present the best opportunity in your financial portfolio to potentially reduce your tax payable. But the moment is critical. The path to charitable giving success in an active M&A environment requires you to carefully consider charitable opportunities to unlock your hard-earned value, rather than have unintended tax consequences that erode the investment.
For example, suppose 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 hold in Company A have significantly increased in value from when you originally purchased them. for $20 a share over a year ago. As a charitable investor, if you plan to donate your appreciated shares before October to charity, you can not only achieve your charitable goal, but also eliminate capital gains tax.
So, are you ready to make strategic philanthropic decisions amid rapid M&A announcements? Consider the following M&A checklist to guide you:
Review your holdings with the help of your trusted advisor
Whether you’re an insider, employee, founder, or investor, your advisor can provide more details on charitable compensation strategies and model the impact based on your entire specific portfolio, including public and private equities. , as well as cash and cryptocurrencies.
Understand all transfer restrictions
If you are affiliated with the company, it is essential not to engage in insider trading. “Typically, insiders are subject to transfer restrictions prior to the closing of the M&A transaction. A charity with expertise in this area can better engage with corporate attorneys to navigate the voting issues and ensuring compliance and a successful outcome,” said Amy Grossman, vice president, Complex Assets Group at Fidelity Charitable.
Be clear about your charitable goals and timeline, especially if giving back is a priority
Without proper planning, some M&A transactions could result in 100% recognition of capital gains. If you learn of an upcoming transaction before shareholder vote, you have the option of donating the shares covered by the operation to a charity of your choice. You may qualify for a fair market value tax deduction and not be subject to capital gains tax. It is very important to consult your tax advisor before employing this tactic.
However, if you consider this strategy after the trade is complete, all is not lost. You still have the option of potentially offsetting the tax consequences by making a charitable donation with cash or an asset from your financial portfolio by December 31, 2022.
Consider Diversifying Your Charitable Donations Amid the Capital Gain Triggering Event—for the short and long term
With unexpected income resulting from an M&A event, a compelling alternative to donating directly to one or more charities after the event with an after-tax donation is to leverage a Donor Advised Fund (DAF ). A DAF is a public charity-sponsored program that allows you to make an irrevocable charitable donation of stock prior to the event. This gives you the 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 large capital gain in an upcoming M&A event? Prepare now to proactively approach this urgent 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, especially in the unpredictable market. ‘today !