Independent Thinking^®

Transaction & Wealth Planning: Timing is Everything

This looks like another banner year for deals in the United States, notably in Silicon Valley. There are now 144 so-called unicorns – private companies with valuations of $1 billion or more – and a huge appetite for merger and acquisitions in an otherwise low-growth market. In the race to get deals done, entrepreneurs and executives risk forfeiting substantial planning opportunities for themselves and their families.
 
While strategies to minimize personal estate, income and capital gains taxes, provide for liquidity needs, and manage concentrated stock positions may be the furthest thing from the minds of people focused on the future of the company that they have built, timing is everything in wealth planning too. The earlier the strategic wealth planning kicks in, the better. Ideally, entrepreneurs and executives should be in contact with both their corporate advisor and their wealth advisor from the very beginning of the transaction planning stage through the conclusion of the deal, and into the next stages of their business and personal lives.
 
Let’s look here at some options for John, a CEO with a $60 million stake (at a zero-dollar cost basis, for income tax purposes) in a private technology company that’s likely to be acquired in the next two years. Both he and his wife, Anne, are 53 years old and spend about $750,000 a year after taxes from his income. They have two children and two grandchildren, to whom they plan to leave most of their wealth, but are also interested in establishing a charitable legacy, either in a trust or through a private foundation.
 
In pre-transaction wealth planning, we create a comprehensive goals-based investment plan, taking into account the various investment goals and objectives for individual, trust, and charitable assets. We determined that this couple needs $30 million in liquid assets to sustain their current lifestyle and preserve their capital. Our recommendations included:
 

• Retaining $30 million worth of the company shares (at current pre-transaction value)
• Transferring the equivalent of $20 million shares in a zeroed-out two-year grantor retained annuity trust, or GRAT, with a 2% so-called hurdle rate to exploit the lack of marketability and minority interest discounts on the shares¹. When the GRAT terminates, the remaining assets will pour over into follow-on grantor trusts created for the benefit of the couple’s two children.²
• Utilizing both John and Anne’s gift tax and generation-skipping transfer tax exemptions to transfer $10 million worth of shares directly to grantor trusts for the benefit of their children and grandchildren³. These grantor trusts have provisions that allow the children access during their lifetimes (subject to the discretion of an independent trustee), but are ideally set aside for grandchildren to leverage the generation-skipping tax exemption, which would otherwise be wasted. In other words, this structure is designed to balance the long-term intent of the grantors while providing for any potential needs of the children.
• Selecting an individual and an independent corporate co-trustee to govern family and charitable trust entities (see the related articles on pages 12, 14 and 16).
• Donating $20 million worth of long-term appreciated shares (at post-transaction value) to a charitable foundation (and being mindful of the impact of securities law restrictions).

 
Post-transaction, the work continues. We help to make sure that the stock sales and gifts are in keeping with regulatory requirements and timed to maximize potential tax savings. We also evaluate whether a swap of assets in-kind between the grantors and the grantor trusts is prudent, based on the differing tax characteristics and goals of the different family stakeholders.
 
Each transaction is different, as are the goals and constraints of individuals involved. Decisions around the actual proceeds of a transaction should include an assessment of the differences in value and associated risk, deal terms, and the potential impact of securities law restrictions, which can significantly affect the ultimate value and access to the proceeds. The benefits of this pre- and post-transaction planning, as illustrated in the chart above, can be significant, far more so for those who live in California and other high-tax states. (This example was based on a couple living in a state without income tax.)
 
It seems to all of us at Evercore that it’s well worth taking the time to get this right. It is our job to ensure that our clients, the entrepreneurs and executives – and their families – fully realize the rewards of all the work and sacrifice that went into building these companies.

Iain Silverthorne is a Partner and Wealth Advisor at Evercore Wealth Management in San Francisco. Stuart Francis is the Senior Banker in the Evercore office in Menlo Park, California, and leads the firm’s Silicon Valley Technology practice. For further information on pre- and post-strategic wealth planning at Evercore, please contact Iain Silverthorne at [email protected] or Chris Zander in New York at [email protected].

¹IRC. Sec. 7520 rate in December 2015.
²As the sale of the private company was for stock, the grantor trusts created for children will hold shares of the new company stock. The use of GRATs allows John and Anne to pay all related capital gains taxes, effectively lowering their taxable estate. The remaining assets in a GRAT, after all annuity payments are made back to the grantor, will pass
into grantor trusts for the benefit of the children. The grantors, while living, can be responsible for the income taxes due on the income of the trusts, unless they choose to relinquish that provision.
³The IRS applicable exclusion limit is currently $5.45 million per person.