2025 Tax Smart Liquidity Planning

By 213 Strategic Partners on April 2, 2025

Pre- and Post-Transaction Planning Strategies to Help You Keep More of What You Have Built

Our team has had the privilege of guiding entrepreneurs and founders through over 100 transactions. We believe these are the biggest issues to consider in advance of an event.

Pre-Transaction Planning in Advance of a Transaction

Why This is Important

Pre-transaction planning involves dedicating a small amount of time well in advance of a company transaction to help you achieve a better outcome from your equity and retain more of what you have built. The Exit Planning Institute revealed that over 78% of business owners and executives of early-stage companies are relying on the sale of their business to secure their financial independence. However, 80-90% of a business owner’s wealth is tied up in the value of the business.[1]

Our team has witnessed this firsthand, having advised entrepreneurs through transactions. We have seen countless dollars left on the table because clear planning strategies were not identified or implemented. A few hours with a qualified team of advisors can mean the difference between a beneficial outcome and one that is less rewarding.

A liquidity event is very uncommon — often a once-in-a-lifetime success achieved after years of hard work and dedication. In fact, many entrepreneurs, concentrated stockholders, or top executives may dedicate their entire careers without ever experiencing this type of event.

As a result, many entrepreneurs find themselves underprepared both psychologically and financially. While these events provide shareholders with the potential to accumulate substantial, life-changing wealth, they also introduce new tax and legal obstacles that are foreign to all but the most sophisticated investors and advisors. However, if properly planned for in advance, many of these new challenges can be minimized or eliminated altogether. The earlier you plan, the greater the range of opportunities.

Bottom Line: A thoughtful pre-transaction plan ideally begins 18-36 months before the liquidity event. This includes considering a range of outcomes, from the most optimistic to no event at all, and addressing relevant income tax, capital gains tax, and wealth transfer tax issues. If these issues are addressed in advance, you may be able to retain more of what you have built. A qualified team consisting of an M&A advisor, certified public accountant (CPA), estate attorney, and CERTIFIED FINANCIAL PLANNER (CFP^®) can be invaluable.

Tax Planning Strategies to Consider in a Changing Tax Environment

Income Tax Planning Considerations in Light of Potential Changes

Although previous tax policy proposals to raise the top personal income tax rate have not made their way into law, higher earners could soon face higher income taxes nonetheless. Under current law, the top rate is scheduled to increase from 37% to 39.6% starting on January 1, 2026, if not changed sooner by additional legislation. This means that liquidity events over the next couple of years could be more tax-advantaged than those thereafter.

83(b) Elections & Why They are Beneficial

The 83(b) election allows you to choose to be taxed on the entire amount of shares at the start of a vesting period. Instead of paying taxes annually, you pay all the tax upfront based on the full market value on the date of grant. It is critical, however, to make this election within 30 days of the stock grant being made. The tax is usually ordinary income based on the valuation of the stock minus the amount paid for it. When the election is made within this timely 30-day period, the clock begins to tick for long-term capital gains treatment.

Simply put, an 83(b) election is an exercise in confidence that the value of the new company is going to increase. If this is the case, you’ve paid taxes early at a low or zero value, and when the company grows, you can sell shares held for more than a year at a long-term capital gain rate. Even at the highest marginal income tax rates, 37% in 2025 for a married couple filing jointly, this is a benefit.

The highest capital gain rates plus health care tax in 2025 is 20%. For taxpayers subject to the Net Investment Income Tax (NIIT), the effective tax rate on long-term capital gains and qualified dividends can rise from the base 15% or 20% rate to 18.8% or 23.8%, including the 3.8% NIIT. Even at these highest rates, the tax savings between the long-term capital gain rate and the ordinary income rate can be significant. From the issuing company’s perspective, the 83(b) election causes an acceleration of both the employee’s payment of taxes and the employer’s deduction of the compensation expense.

Gifting Strategies

If you have transferable equity ownership in an entity, these shares can be gifted to loved ones. An individual can make gifts up to $19,000 per recipient per year, free from gift taxes. If this is done in advance of a transaction, the tax liability at the transaction may result in a lower capital gains tax rate. For 2025, the income thresholds to be in a 0% long-term capital gain bracket are $48,350 for single tax filers and $96,700 for married couples.

Pay Certain Expenses Directly

Unlimited payments for qualified medical and educational purposes can be made on behalf of another person without generating gift tax, enabling investors to accelerate their gifting strategies. These gifts must be made directly to the respective medical or educational institution to qualify for exclusion.

Bottom Line: Business owners and executives who hold equity in their company should consider monetizing a portion of their equity to capitalize on present low rates. Strategies such as 83(b) elections and exercising and holding options to convert ordinary income to capital gains tax are also strong considerations.

Public Equity Transaction Planning

Stock options should be evaluated before a liquidity event takes place. For example, compensatory stock options can be a significant asset for executives and owners, presenting some interesting challenges during a liquidity event.

IPO Event

Once a company goes public, shareholders will be subject to a lockup agreement between the business and the investment bank taking the organization public. This agreement states that shares cannot be sold within a specific period after the IPO event, usually 180 days. Once the contract is fulfilled and the lockup has expired, shares are generally free to be sold in the marketplace. Most of the strategies articulated in the preceding stock deal section are available at this point. For example, stock can be sold or hedged, or a monetization collar strategy can be used. Executives should also consider diversifying concentrated holdings and strategies focused on minimizing current taxation. Without a 10b5-1 plan, owners are confined to selling or transacting company stock during open windows.

Non-Qualified Options (NQ)

The spread between a stock’s fair market value and exercise price is treated as income when an executive exercises non-qualified options. This spread is taxed based on the individual’s tax bracket and is subject to employment taxes and withholding. Depending on the holding period, gains or losses after the exercise of the option may be treated as short-term or long-term capital gains. At exercise, you have two choices: You can simultaneously exercise and sell the shares, or you can choose to exercise and hold the shares for some period of time. If the shares are held for more than 12 months after an exercise and hold strategy, any gain would be treated as long-term capital gains instead of ordinary income. For owners who find themselves in the maximum tax bracket, the tax savings could be substantial if they exercise early and hold for capital gains treatment.

Incentive Stock Options (ISO)

Executives who meet holding-period requirements may benefit from additional tax advantages, as compensation income is not produced upon exercise. Although ISOs may be subject to the alternative minimum tax (AMT), executives can later claim credit for the paid AMT. The credit amount depends on income and deductions in later tax years.

Restricted Stock Units (RSU)

RSUs are another way an employer can grant equity participation to an employee. The grant is restricted because it is subject to a vesting schedule. You receive the shares at the vesting date, at which point they are always taxable as ordinary income. If you hold them past vesting, future appreciation is taxable as capital gains. Shares held one year or more enjoy the lower long-term capital gains rate.

10B5-1 Plans

Without this type of plan, owners are confined to selling or transacting company stock during ‘open windows,’ typically three business days following an earnings announcement. To manage these rules and restrictions, some executives opt to use a 10b5-1 plan. These plans are filed with the SEC and include a stated-in-advance program where the officer establishes some metrics inside the plan before relinquishing control. The plan is essentially on autopilot, with a trader associated with the selling system, generally based on price, number of shares, and/or certain dates. Once these items are established, they should not be modified. Modification is only possible if it’s allowed under the insider trading policy of the company and the holder is within an open window. 10b5-1 plans must be adopted during an open window and generally have a cooling-off period of anywhere from two weeks to 90 days.

Insider Trading Policies

After the transaction is complete, understanding insider trading policies becomes important. This can include restrictions on how stock is sold and whether hedging is allowed. An experienced advisor can help you navigate concerns and questions involving corporate insider trading policies.

Liability Management

The use and tax implications of debt before and after an event are also key in the planning process. Our analysis of debt involves both the after-tax cost of the debt versus a low-risk investment, as well as the qualitative goal of being debt-free that often follows a liquidity event. This is especially important now as the Tax Cuts and Jobs Act (TCJA) capped the deductibility of mortgage debt at $750,000, a provision set to expire at the end of 2025. When reviewing your mortgages, home equity lines of credit, and student loans from these two perspectives, our team can assist with guidance and clarity regarding paying down debt entirely.

Bottom Line: A clear understanding of the nature of your equity is critical to developing a cohesive plan. One of the biggest mistakes our team observes is when executives are subject to concentration risk by allowing their own company to represent more than 30% of their total liquid asset base.

Post-Transaction Planning Strategies to Help Keep More of What You Have Built

While it’s true that more opportunities exist during the pre-liquidity planning stage, there is still plenty to accomplish after the transaction is complete. Choosing the best approach depends on the type of transaction such as an all-cash deal, stock deal, or IPO event and the actions taken before the liquidity event.

All-Cash Deal

An all-cash deal may limit some of the planning opportunities; however, opportunities to shelter wealth from taxation still exist. For example, in cases of closely held businesses, there can be significant value in evaluating the ownership structure of the business. Depending on the potential exit, it can make sense to reorganize in advance of a deal. In cases where this is not an option, taking advantage of retirement and deferred compensation contributions can be leveraged to protect wealth and drive down taxable income.

Individuals should also consider any charitable inclinations, such as establishing a family foundation or donor- advised fund, charitable remainder trust, or outright gifts to charity. These strategies serve a dual benefit because they can provide a significant tax savings while at the same time providing a social benefit to donors and their designated charities.

After the liquidity event, advisors can also evaluate how money is being held to limit tax exposure. For example, investors may qualify for special tax treatment on capital gains tax under Section 1202 of the IRS code. Additionally, there may be capital gains exemptions available for deal proceeds used to purchase another qualifying small business.

Accelerate Contributions to Retirement Accounts & 529 Plans

Make sure you are taking full advantage of employer-sponsored retirement plans such as 401(k), 403(b), or SIMPLE plans. If you are self-employed, you can fund a Simplified Employee Pension (SEP) up until the due date for filing your taxes. Your pre-tax savings in the plan can help reduce your tax liability in this calendar year.

You could also choose to “frontload” 529 plans to fund education for your loved ones by as much as $95,000 ($190,000 for married couples) by consolidating five years of annual gift-tax-free contributions of $19,000 ($38,000 for married couples) into one lump sum contribution. However, please note that you will not be allowed to gift to that specific recipient or the 529 plan until five years have passed, unless you’re willing to pay gift taxes or use part of your lifetime estate and gift exemption.

Philanthropy & Tax Planning

Many entrepreneurs are already active in charitable endeavors, so philanthropy can be an appealing strategy for offsetting tax liabilities. If you have significant assets that you are inclined to donate, you can set up a private 501(c)(3) foundation, which enables you to direct gifts to religious, educational, scientific, and other types of charitable organizations. For example, with a $3 million inflow from a sale, you could place $500,000 into a family foundation. This would reduce your taxable income and provide a pool of money from which to draw for future donations. For relatively smaller allocations to philanthropy, you could also consider a Donor Advised Fund (DAF).

Donor Advised Fund (DAF)

A donor advised fund is a helpful tool for smaller contributions to public charities. This is a vehicle offered by many financial institutions that can receive contributions of cash or securities. The donor receives a current year income tax deduction but has many years to distribute to qualified charities. The donor-advised fund can be funded up until December 31 in the year of the transaction and provide a bucket for future charitable giving.

Pennsylvania Education Improvement Tax Credit Program (EITC)

The Educational Improvement Tax Credit Program allows businesses to support financial aid for educational organizations and fulfill their state tax burden. Through this program, businesses can receive a 75% state tax credit or a 90% state tax credit (if making a two-year commitment) on their contributions per year. Many independent secondary schools have credits that you can access to take advantage of this benefit.

Risk Management

While your asset base is illiquid, there is a greater need for inexpensive term life insurance and long-term disability protection that will provide an income stream if you are unable to work. When your asset base becomes more liquid and you become “self-insured,” your need for life and disability insurance may decline, but you should consider umbrella protection. An umbrella policy, obtained through many of the same insurance vendors that offer homeowner coverage, sits on top of your existing coverage to protect your asset base against litigious actions.

Post-Transaction Planning Strategies to Help Keep More of What You Have Built

We are in a fluid environment in terms of tax planning given uncertainty surrounding tax reform. This year, proactive planning is especially important due to potential changes in tax policies under the new presidential administration. With the return of President Trump, there may be significant adjustments, including changes to the Tax Cuts and Jobs Act (TCJA), inflation adjustments, and potential new tax proposals. Our team is prepared to stay informed and proactively plan ahead to help you navigate these uncertainties effectively.

1. IRA to Roth Conversions as a Gifting Strategy: For pre-retirees or current retirees who do not need their required distributions to maintain their lifestyle, IRA to Roth conversions may make more sense. Given that your heirs will now have to withdraw the IRA they inherit and pay taxes over 10 years, an opportunity exists to use taxable assets to pay the tax now. This allows the Roth to compound income tax-free for your use and be inherited by your heirs completely tax-free.
2. Back Door Roth to IRA: The extension of required minimum distributions to age 73 makes backdoor Roth IRA contributions even more attractive. If you do not have any other type of IRAs besides Roth, you can contribute up to $7,000, or $8,000 if over the age of 50, to a non-deductible IRA and then do an immediate conversion to a Roth IRA. This can be done with no income limitation. The Roth IRA grows income tax-free and is not subject to required minimum distributions at age 73.
3. Taking the Standard Deduction v. Itemizing Deductions: In 2025, the standard deduction is $15,000 for single tax filers and $30,000 for married filing jointly. Given these increases, you should consult with your CPA to see if it makes sense to accelerate certain itemized deductions, such as charitable gifts, into one year where you itemize but then use the higher standard deduction in others.
4. Maximize Contributions to Health Savings Accounts: For those actively working and funding a high-deductible plan (not Medicare), HSAs are used as specialized checking accounts where contributions are made and distributions are taken for qualified expenses in the same year. This allows you an income tax deduction in the year of the contribution. However, because there are no rules requiring the funds in an HSA to be used in the current year, an alternative opportunity arises: contribute funds to the HSA but do not use the HSA to pay medical expenses incurred. Instead, pay for current year medical expenses out of pocket and keep contributing to the HSA, allowing it to grow and compound for later in life. The HSA contribution limits for 2025 are $4,300 for self-only coverage and $8,550 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.

Bottom Line: There are myriad strategies to reduce your tax burden post-sale that combine tax minimization with philanthropy. Transactions that generate gains, whether as ordinary income or capital gains, are also subject to state tax liability.

  [1] As of 1/1/25