Avoid Hidden Investment Costs
We never cease to be amazed at what little time is spent by the typical investor trying to get a handle on what his or her investing costs are. Read more…
In the midst of any merger, it can be hard to see past the near term. Changes to organizational structure, culture, and roles and responsibilities are at the forefront of everyone’s minds.
That said, as the Monsanto-Bayer merger quickly approaches, it’s critical that you look past day-to-day implications of the deal. We’ve worked with several Monsanto employees for many years, so we understand the changes you’re facing. But, while no less important, you don’t want to let near-term choices keep you from making critical decisions that affect your financial goals.
So, what does this deal mean for you in the long term, and how should you apply your cash payout toward your financial goals? Start by asking yourselves the following three questions.
At the close of the Monsanto-Bayer merger, your options and restricted stock will vest and your Monsanto stock will be paid in cash at $128/share. That’s a large sum of money—and therefore has the potential to significantly impact the trajectory of achieving your future financial goals. Take the time to analyze what this means for you. Your financial planner can help you map this out if you’re not sure where to start.
Before you get carried away with allocating or spending your payout, remember you have to first pay taxes on your options, restricted stock units (RSUs) and held Monsanto stock. Under normal circumstances, you’re taxed on options when you exercise them and RSUs when they vest. However, under the terms of the Monsanto-Bayer merger, at closing your options will be exercised and RSUs vested immediately along with any shares of Monsanto stock you own liquidated at $128 per share. This means you’ll receive additional taxable income this year. This is a good problem to have, but it’s important to plan ahead for the taxes that come along with the additional income.
For example, on your stock options, you will pay ordinary income tax on the difference between the sale proceeds (at $128/share) and the original exercise price of each option grant you own at the time of closing. And, the entire value of your RSU payout(s) will be subject to ordinary income tax. Depending upon your income level, this tax rate could be as high as 39.60% at the federal level.
If you currently own Monsanto company stock, you’ll pay capital gains tax on the gain resulting from the sale of those shares at closing. These capital gains, however, are subject to a lower tax rate. Depending upon your income level, the difference between the sales proceeds (at $128/share) and your cost basis (the price you acquired the shares) will be taxed on the federal level at either 15% or 20%. In addition, again depending on your income, this capital gain may be subject to the 3.8% Net Investment Income Tax. Therefore, you could be looking at a potential federal tax bite of 23.8% on any built-in gains in your current Monsanto holdings.
Looking at your financial plan, determine where to pad with your payout. Your financial planner or wealth manager can help you evaluate which areas make sense for your personal situation—in other words, which best support the goals and objectives laid out in your financial plan.
To the extent you have philanthropic intent, Monsanto stock you currently own provides an opportunity to fulfill your charitable goals. When you donate stock you have owned for more than one year, you can deduct the full fair market value of the stock at the time of the donation. This deduction is subject to limitations based on your Adjusted Gross Income (AGI). In most cases, the deduction cannot exceed 30% of your AGI. In some cases, the limitation would be 20%.
As long as you get the timing right, the gain related to the Monsanto merger will not be taxable on your tax return. There are various charitable planning strategies you can pursue, but the appropriate strategy will vary depending upon your individual objectives and the amount of your potential donation.
Timing of your execution is also critical. Once the merger is “practically certain to occur,” the opportunity to donate Monsanto stock and avoid the related capital gain will close. Unfortunately, there is no bright line test for when a merger becomes “practically certain to occur.” In this instance, the merger could still be viewed with some uncertainty while substantive regulatory approvals are still outstanding. Given the complexity of the tax laws, it’s important to discuss a potential charitable gift with your financial planner and/or CPA as soon as possible.
Post-deal, there are a number of additional planning opportunities available to you. For example:
Keep in mind that the appropriate way to allocate the payout will vary from person to person. There is no one-size-fits-all approach and the preparation of a comprehensive financial plan should be the starting point for making these various decisions.
As you weigh your options, it’s important to work with a trusted professional who can bring together your financial advisor, estate planning attorney, CPA and other professionals. It’s vital that your advisors work in collaboration to ensure all aspects of your financial plan are covered.
At Plancorp, this idea of advocating on behalf of our clients—both in financial planning and asset management, as well as by coordinating their professional teams—is core to our approach to client service. Because we work with a number of Monsanto employees, we are very familiar with your benefits package.
If you have any questions about what this merger means for you, or would like to begin preparing for your financial future, please give us a call at (636) 532-7824 or fill out the form below. We’d be happy to meet with you to discuss your unique goals for the future and provide a complimentary draft of a Financial Plan. We look forward to meeting you and helping you through this exciting time in your financial life.