When I grew up on the north side of Holland, my school for four years of my life was Beechwood school. Beechwood was a pretty old school. In fact, at one time, my mother even attended Beechwood. However, Beechwood no longer exists. Instead it is an open space/parking lot owned by Pfizer. Pfizer is the successor to a company called Parke-Davis. Parke-Davis produced pharmaceuticals at its plant on Howard Avenue (across the street from Beechwood) for many years, employing hundreds of Holland residents and bringing more than a few Ph.D. chemists to Holland. I know this for two reasons. One, my Dad used to play on the Parke-Davis fast pitch softball team; and two, many of these former employees of Parke-Davis (and now Pfizer) have been estate planning clients of mine.

Alas, Pfizer has now also gone the way of Beechwood, and the original plant has been razed, and operations closed down. But we still have a lot of retirees living in Holland with significant holdings of Pfizer stock. I bring this up because Pfizer has announced a merger with Allergan. This merger is a so-called “inversion” in which the surviving company (Allergan) will be an Irish company with headquarters in Dublin. This is a very smart move from a corporate viewpoint, since Ireland doesn’t have a corporate income tax, BUT IT HAS POTENTIALLY LARGE TAX CONSEQUENCES FOR THE SHAREHOLDERS OF PFIZER. You can read more of the details here. http://www.streetinsider.com/Corporate+News/Pfizer+(PFE),+Allergan+(AGN)+Enter+~$160B+Merger/11098755.html

Shareholders of Pfizer will be given a choice. They can cash out their stock or they can receive Allergan shares. HOWEVER, either way the shareholders of Pfizer will pay capital gains taxes on the difference between what they paid for their shares (usually very low) and what they are worth on the day of the stock swap. For those who choose to accept the swap of stock, they will have phantom income and will have to pay capital gains tax.

Now note that if the stock is in a retirement plan (401k, IRA) there will be no direct income tax consequences. This only affects stock held outside of retirement plans. HOWEVER, if you have NUA (net unrealized appreciation) on the shares in your plan, you can get special tax treatment on distributions of the stock out of your plan. You should consult a financial advisor to see if this would benefit you.

Essentially stockholders of Pfizer will be in a “forced taxation” situation unless they take pro-active steps prior to the end of 2015. Any action that is taken to avoid recognition of the income by a shareholder must be taken before the shareholders have approved the sale. Here are some ideas that might be worth discussing:

  1. Gift the stock to a family member whose income is in the bottom two tax brackets.
  2. The same result could be achieved without parting with control over the proceeds by putting the stock into a Family LLC and gifting the units of ownership of the LLC to family members in low income tax brackets.
  3. Pay attention to what tax bracket you will likely be in for 2016, and if the additional income pushes you into a higher bracket, consider selling some stock in 2015.
  4. Consider charitable gift planning.
    a. Outright gifts to charity, if you have no desire to control anything;
    b. Gifts to donor advised funds, if you only want to control how the funds are used;
    c. Gifts to Charitable Remainder Trusts, if you want to retain the income from the asset, AND control how the principal gets used for charity;
    d. Gifts of the stock to a charity in return for a Charitable Gift Annuity.

I have personally helped many people with charitable gift planning. If you want to explore your options, please contact my office without delay. Action must be taken before the shareholders approve the merger.


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