How to Plan for a Liquidity Event

Are you getting ready to sell your business? Perhaps you’re about to have an initial public offering (IPO). Either way, you may be facing a significant liquidity event that could transform your finances. Your work life is probably quite hectic these days, filled not only with your usual day-to-day business operations, but also preparing for the big event.

There are personal planning considerations for you as well, given that a liquidity event can be life-changing. The financial impact on you and your family could be significant, but you’ll need to be proactive to ensure you preserve the opportunities your wealth provides.

Here are three main planning actions to consider when you’re facing a possible liquidity event:

1. Financial planning

While many people may think of financial planning as aligning income, expenses, savings and goals to their plan for retirement, in the context of a liquidity event, we think it’s more about planning for scenarios before and after the business sale. You may be wondering how cash flow will work until the sale, and then afterward as well. Perhaps you’re evaluating how much of a payout you need to negotiate before you’re ready to sell your business or initiate an IPO.

There are also other introspective, more qualitative questions to consider, such as: What does this wealth mean for you and your family? What kinds of opportunities (and potential challenges) will it create for you? How does it relate to your broader goals and dreams? Do you want to dedicate a portion of your assets to philanthropy? If so, what causes are you most passionate about? Or, are you planning for your next venture and considering what investment you’d need for that?

We can help you frame key questions like these and model the impact of the various choices you make.

2. Tax planning

The tax impact of a liquidity event can be tremendous (it varies by state). In the year of the sale, your income may skyrocket, which could mean paying a hefty portion of the proceeds in tax.

Planning early, however, may help reduce the taxes you owe so you can retain more money.

For example, if you’re philanthropically inclined, consider a charitable trust. Depending on the Section 7520 interest rates at the time you create your charitable trust, a charitable lead trust or charitable remainder trust may be more beneficial. Both are irrevocable trusts that offer a tax deduction for the charitable donation.

In a charitable lead trust, a charity receives a stream of income for a period of years. After that time elapses, the remainder passes to an individual beneficiary of your choice.1

In a charitable remainder trust, an individual (typically the grantor) receives a stream of income from the trust for a period of time, usually for the rest of their life. Afterward, the charity receives the remainder of the assets.2

Your Corient Wealth Advisor and accountant can work together with your estate planning attorney to determine which trust is most appropriate for you, and the attorney will create the required documents. There are many ways to structure these trusts to tailor them to your needs and situation, so be sure to consult with your team.

Simpler charitable giving vehicles may also be used to help offset your tax burden. Donor-advised funds (DAFs) can be a great way to earmark funds for charity, even if you aren’t yet certain which specific charities you’d like to support. You get a tax deduction in the year you fund your DAF, so the DAF can be designed to reduce your taxes immediately. You then have an indefinite number of years to make grants from your DAF to the charities of your choice.3 This allows you to dedicate funds to philanthropy, reduce your taxes in the year of your liquidity event and experience the satisfaction of giving over time.

The structure of the sale itself can be uniquely designed to maximize the after-tax value of the sale. An attorney specializing in business taxation may be a valuable contributor around this topic to help ensure the sale structure is as advantageous as possible for you.

3. Generational gifting and estate planning

If your liquidity event will create a taxable estate, we think it’s especially important to plan ahead for how to transfer your wealth. Once you receive a Letter of Intent (LOI) for your business, you have a defined business valuation. Much of the benefit of estate planning is realized when assets are likely to appreciate beyond their current valuation. Therefore, estate planning is where it can be most urgent to think ahead and prepare for the circumstances at hand.

You’ll likely need to assess your family dynamics. What level of wealth is there beyond what you need? If you have children or grandchildren, how much would you like them to receive? What restrictions (e.g., implementing a certain type of trust) would you like to put in place based on their ages? Are there other considerations that are important to you?

You may also face tradeoffs in terms of the control that you maintain over your wealth and minimizing taxes. Many of the tax strategies that are helpful in business sales will reduce control to varying degrees. Typically, the more control you relinquish in these structures (to other decision-makers or other beneficiaries), the more your taxes are reduced. Various irrevocable trust structures like Grantor Retained Annuity Trusts (GRATs) can be used to ensure money is passed to your beneficiaries while mitigating estate taxes, but note that they do move assets out of your control.

Your financial team, especially your estate planning attorney, are critical partners in this conversation to help ensure a reasonable and acceptable balance between level of control and tax reduction.

The earlier you plan for a liquidity event, the more likely it is that you’ll be able to protect and preserve the wealth you’ve worked so hard to earn over the years. Please contact us if you’d like to discuss your specific situation and how we can help you proceed with greater confidence.




Anna Diaz, CFP®

Anna Diaz, CFP®

Partner, Wealth Advisor

Anna is a Partner, Wealth Advisor in our San Diego office. Passionate about helping her clients both understand and navigate the financial questions they face throughout their lives, she especially loves partnering with people to accomplish true success on their terms. Anna has over 20 years of experience in the wealth advisory field and holds elevated designations such as the CERTIFIED FINANCIAL PLANNER™ certification, Certified Private Wealth Advisor (CPWA) and Certified Exit Planning Advisor (CEPA) designations. She also holds an executive certificate in Investment Strategies and Portfolio Management from Wharton and is currently studying for the Accredited Estate Planner designation (AEP). Anna enjoys simplifying the complex financial world so her clients maximize their outcomes, feel empowered in their financial decisions and feel they have a partner who has a close eye on their financial wellness.  Anna is passionate about giving back and serves on the board of Stella Foundation, an organization that helps female founders. She is most proud of her role as a mom to her two children and has been married to her husband for 15 years. Anna loves being outdoors in her city, family time, reading, music (of all types!) and salsa dancing when she gets the chance.

Hope Carlson, CFP®, CAP®

Hope Carlson, CFP®, CAP®

Partner, Wealth Advisor

Hope is a Partner, Wealth Advisor in our San Diego office. She joined legacy firm Dowling & Yahnke in 2017. She is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Chartered Advisor in Philanthropy (CAP®) designation.

Prior to Dowling & Yahnke, Hope spent six years as the chief development officer at the Museum of Us, overseeing fundraising and marketing. She also served as the interim executive director for the San Diego Civic Youth Ballet in Balboa Park and for four years as a strategy consultant with the Boston Consulting Group.

Hope holds a Master of Business Administration (MBA) from Harvard Business School, where she was a Baker Scholar, graduating in the top 5% of her class. She also obtained her Master of Music in Vocal Performance and Literature from the Eastman School of Music and a Bachelor of Arts in Economics with Highest Distinction from the University of Virginia.

Trained as an opera singer, Hope is passionate about music and the arts. She lives in La Jolla with her husband and two daughters.