Tax Planning for You and Your Families Future

Tax planning for you and your families future.

If you’re like most Americans, a quick peek inside your closet or dresser will reveal at least one item displaying Ralph Lauren’s ubiquitous polo logo. If so, you’re already a part of this story.

Ralph Lauren began his career selling ties for Brooks Brothers. But ever since he launched Polo Ralph Lauren in 1967 with just $50,000, he’s built his brand into an icon. He’s expanded his product line into flatware, bedding, and lighting, among other products, and opened stores as far away as China, Israel, and Qatar. Forbes magazine recently estimated his net worth at $4.6 billion, ranking him 173rd-richest person in the world.

Lauren took Polo public in 1997. He still controls over 90% of the company. But, as part of a “personal asset diversification plan,” he’s filed plans to sell up to 11.35 million shares to the public and to the company itself. With shares currently trading around $82, that translates into nearly a billion-dollar sale. (Cha-ching!)

That billion-dollar sale will generate plenty of taxable capital gain. We don’t know what Lauren’s “basis” is for those shares. But it’s likely to be low, so let’s assume it’s $100 million. That would leave $900 million in capital gain. Tax on capital gain is currently capped at 15%, which means Lauren owes the IRS $135 million. (Think Uncle Sam will trade in his old red, white, and blue outfit for something from the Polo Purple Label collection?)

What if Lauren waits a few months to sell? Well, on January 1, the capital gains rate jumps to 20%. That means an extra $45 million in tax, on top of the first $135 million. Ouch!

What if he were to wait until 2013? At that point, the new 3.8% “unearned income Medicare contribution” kicks in. That means an extra $34.2 million, on top of the first $135 million and next $45 million.

And that assumes Washington doesn’t raise rates even higher between now and then!

Investment advisors offer several sophisticated strategies for pulling cash out of publicly-traded stock without actually “selling” and paying tax. These include “collars,” “swaps,” and the ever-popular “variable prepaid forward.” But most of those strategies merely delay the tax without eliminating it.

It’s easy to believe that Lauren is choosing to sell now and just get those taxes out of the way before rates go up. And with the federal government spilling red ink faster than BP spills oil, those rates aren’t likely to come down again until bell-bottoms are back in style.

It’s also easy to imagine more American billionaires selling similar assets before rates climb. These sorts of sales tend to push prices down – in fact, Polo shares fell about 3% after Lauren announced his plans. So don’t be surprised to see other stocks falling as founders cash in before taxes rise.

Do you have appreciated assets like stocks, mutual funds, real estate, or a business that you’d like to sell someday? What about family, friends, or colleagues?

The right tax plan can make a world of difference in what you actually keep from the sale.

This post was written by Karen Ryan,

135 W North Street Suite 1 Brighton MI 48116

1-800-498-8207

Further information on Tax Information and Coaching.

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