Liquidity Event on the Horizon? Don’t Wait to Plan for the Tax Impact

Selling a business. Exercising stock options. Cashing in on a windfall. Moments like these can be life-changing, and tax-changing. A seasoned financial advisor can help clients avoid the tax shock by implementing proactive tax strategies. The biggest mistake clients make is waiting until the liquidity event has already occurred to engage a financial planner. By that point, many of the best strategies tax mitigating strategies are off the table.

Disclaimer: The information provided in this blog post is for general informational purposes only and does not constitute financial, tax, or legal advice. Tax laws are complex and subject to change, and the strategies discussed may not be suitable for everyone. Always consult a qualified tax professional, financial advisor, or attorney to evaluate your specific financial situation and ensure compliance with current tax regulations before implementing any strategy. The author and publisher are not responsible for any financial decisions or losses resulting from the use of this information.

Here are some of the tax strategies a financial advisor can help implement during a liquidity event:

1. Tax-Loss Harvesting is a strategy where you sell investments (e.g., stocks, bonds, or funds) that have decreased in value to realize a capital loss, which can then be used to offset taxable capital gains or other income, reducing your overall tax liability.

Advisors can help:

• Identify underperforming investments to sell and realize capital losses.

• Match short-term losses with short-term gains (taxed at higher rates) and long-term losses with long-term gains.

• Avoid pitfalls like the wash sale rule, which disallows a loss if you repurchase the same or a substantially identical asset within 30 days.

Timing is key. It’s not just about selling losers at year-end, but about managing gains and losses throughout the year in response to shifting income levels.

2. Options Strategies to Control Timing and Risk

In the hands of a thoughtful advisor, options can be a powerful tool to manage risk and defer taxes.

Here’s how:

• Protective puts can hedge downside risk on appreciated stock without forcing a sale that would trigger capital gains.

• Covered calls can generate income on stock you continue to hold, giving you cash flow while deferring gains.

• Collars (buying a put and selling a call) can lock in a price range for your stock and preserve potential tax treatments (like QSBS or ISO holding periods).

Using options allows clients to control when they realize income, and how much risk they carry while they wait.

3. Charitable Gifting and Donor-Advised Funds

Have charitable intent? Liquidity events are prime opportunities to make meaningful gifts and reduce your tax liability.

Financial advisors can help clients:

• Donate appreciated stock to avoid capital gains and take a full fair-market-value deduction.

• Use a donor-advised fund (DAF) to front-load several years of giving into one high-income year.

• Incorporate charitable giving into a broader estate or legacy plan.

This strategy is especially valuable in years when income spikes significantly, like the year of a business sale.

4. Income Smoothing and Roth Conversions

Advisors can also help clients avoid jumping into a higher tax bracket (or minimize the damage if they do) by:

• Spreading out income from installment sales or deferred compensation.

• Filling lower brackets in other years with Roth IRA conversions, especially if income drops post-sale.

• Looking ahead at Medicare surtaxes, net investment income tax, and phaseouts that hit high earners disproportionately.

5. Coordinating with Tax Professionals and Estate Attorneys

No strategy exists in a vacuum. The best financial advisors work as part of a broader team, alongside CPAs and estate planning attorneys, to ensure every move aligns with the client's full financial picture.

Need help finding a financial advisor who knows how to navigate complex tax events?

That’s exactly what we do at Financial Fit. We help individuals connect with vetted, local financial advisors who specialize in the situations they’re facing, so they can make confident decisions during some of life’s biggest transitions.

Disclaimer: The information provided in this blog post is for general informational purposes only and does not constitute financial, tax, or legal advice. Tax laws are complex and subject to change, and the strategies discussed may not be suitable for everyone. Always consult a qualified tax professional, financial advisor, or attorney to evaluate your specific financial situation and ensure compliance with current tax regulations before implementing any strategy. The author and publisher are not responsible for any financial decisions or losses resulting from the use of this information.