A technology executive asks her CPA whether to sell $2 million of employer stock this year or spread the sales over two tax years.
The CPA compares the alternatives, considering the tax treatment of the shares, projected income, and transaction timing. Assume, for illustration, that delaying part of the sale would reduce the estimated tax liability by $60,000.
That is a meaningful saving. But the client has $4 million in investable assets, half of it in shares of the company that also pays her salary, bonus, and future equity awards.
If the entire $2 million position remains exposed, a 20% decline in the stock would reduce its value by $400,000. A 40% decline would mean an $800,000 loss.
These are illustrations of market exposure, not forecasts. The hypothetical tax saving depends on the assumed transaction structure, and the figures are not directly comparable measures of expected economic value.
They do, however, raise a question the tax calculation cannot answer on its own: how much additional concentration risk is the family prepared to retain to achieve the potential tax saving?
The CPA may have completed the tax analysis correctly. The client still has a broader decision to make.
The decision behind the transaction
For CPAs working with executives, business owners, and affluent families, major financial decisions often arrive as narrowly defined tax questions. A client wants to exercise stock options, sell appreciated shares, change tax residence, or estimate the liability associated with a business sale. Each question requires technical expertise. Yet the consequences can extend into areas the client has not asked the CPA to examine.
In the employer-stock example, the relevant considerations include the family’s liquidity needs, the proportion of wealth tied to one company, and the possibility that a decline in the stock could coincide with a reduction in employment income.
The client may ultimately decide to retain the shares. That can be reasonable, provided the exposure is understood and consistent with the family’s circumstances.
A technically sound tax answer does not necessarily resolve the other material questions on which the decision depends.
A CPA does not need to determine the appropriate investment allocation unless that work falls within the professional’s qualifications and engagement. Recognizing that the proposed transaction creates a separate investment decision, however, can help the client seek the necessary analysis before acting.
A relocation decision with several clocks
Consider an executive preparing to relocate internationally.
The immediate question concerns the timing of a sale of appreciated securities. Should the transaction occur before departure or after the move?
The answer may depend on tax residence, applicable treaties, the source and character of income, and the rules governing equity compensation in the relevant jurisdictions.
But the executive also holds restricted stock units scheduled to vest during the transition, retirement accounts accumulated in the country of departure, and investment accounts that may be subject to restrictions once residency changes.
The difficulty is not necessarily that any adviser lacks expertise. It is that each may be working from a different timeline.
The tax adviser is evaluating the expected change in tax residence. The employer’s equity team is working from vesting dates and payroll requirements. The investment adviser may be assuming that existing accounts can continue to be serviced. The client is planning around a physical move that may not coincide with the legal determination of residence. These dates are not interchangeable.
A transaction can be properly analyzed under one set of assumptions and still produce unexpected consequences if another part of the plan relies on different ones.
Before the client acts, the CPA can help establish which dates are relevant to the tax analysis and identify where specialist advice is needed. A common timeline, shared with the appropriate professionals, may reveal dependencies that would otherwise remain hidden until after the transaction.
The legal and tax conclusions must remain jurisdiction-specific. There is no universal rule that makes selling before or after relocation preferable.
The $12 million sale that does not produce $12 Million
A business owner approaching a sale presents another version of the same problem.
Suppose the owner expects $12 million in gross proceeds. The family is already considering a property purchase, a new venture, and a long-term investment portfolio.
The CPA is preparing the tax projections. The transaction documents may also provide for escrow, indemnification obligations, transaction expenses, or contingent payments.
The amount ultimately available to the family may be substantially lower than the headline figure. Some of it may not be received at closing. Yet financial commitments can begin forming around the larger number.
The same issue arises in the sale of a family business or a substantial commercial real estate holding. The transaction value may be clear, but debt repayment, transaction costs, taxes, retained liabilities, or deferred consideration can materially change the amount available for reinvestment.
The CPA can help establish the expected after-tax proceeds, the timing of receipts, and the amounts subject to known or potential obligations. That information should inform decisions about how much capital can reasonably be committed.
It is not necessary for the CPA to recommend investments or determine the family’s long-term spending policy.
But if the client is making commitments based on gross transaction value rather than reasonably available capital, the issue deserves attention before closing. An amount included in the negotiated transaction value may not be cash the family can deploy today.
A four-point review before execution
Not every tax assignment calls for a broader financial review. The need becomes more apparent when a proposed action is material, difficult to reverse, or dependent on several other decisions.
Before execution, four points deserve attention:
1. The transaction: What exactly is the client proposing to do, and by when? Which steps will become difficult or impossible to reverse?
2. The exposure: How much of the client’s wealth, income, or available liquidity is affected? Is the transaction connected to a concentrated asset, a major obligation, or a change in circumstances?
3. The dependencies: Does the decision rely on assumptions about investment risk, employment, residency, financing, legal arrangements, or the timing of future payments?
4. The responsibility: Which questions fall within the CPA’s engagement? Which require another qualified professional? Who will ensure that material unresolved issues are addressed before the client proceeds?
The fourth point is especially important. Identifying a concern is not the same as assuming responsibility for resolving it. A CPA who recognizes an investment, legal, or cross-border issue should be clear about the limits of the engagement and the need for appropriate expertise.
Equally, referring a client elsewhere does not automatically establish that the broader decision has been reviewed. A brief record of the outstanding questions, relevant assumptions, and agreed responsibilities can help prevent an important transaction from proceeding on incomplete information.
The objective is to make the remaining decisions visible while there is still time to address them.
The value of recognizing what is missing
Tax technology can model alternative transaction structures, project liabilities, and compare outcomes with increasing precision. But the quality of a calculation depends on the scope of the question.
For the CPA, the opportunity is to recognize when a technically correct answer leaves a material financial consequence outside the analysis. That does not require taking responsibility for investment decisions, legal advice, or the family’s entire financial position.
It requires identifying the unresolved issue, explaining why it matters and establishing who will address it before the client acts.
The CPA may not own the entire decision. Recognizing its full dimensions, however, can be one of the most valuable contributions the CPA makes.
ABOUT THE AUTHOR:
Ron Honig is an economist and co-CEO of From-Honig Family Office in Israel. He spent more than two decades in the technology industry, including at Intel, and for nearly a decade has worked with senior technology executives, entrepreneurs, and founders on financial and capital-allocation decisions.
Photo credit: Alexandra_Koch/Pixabay
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Tags: Advisory, cpa, CPAs, tax advisory, Taxes
