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As I mentioned in our last NUA episode, there are potential drawbacks to an NUA election. It’s important, when discussing NUAs with clients, that we highlight both
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the benefits as well as the unforeseen future events that could potentially impact this election. No matter how extensively we analyze and strategize with
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clients on their financial plans, life happens, and events change the calculus of the best-laid plans. I wanted to provide a current, actual example where a
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well-thought-out NUA election can end up costing us tax dollars years after the original NUA election was made. Our
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example is Health Information Technology provider Cerner Corporation. Cerner is currently in the process of being acquired by Oracle Corporation in an
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all-cash transaction at $95 per share. Let’s analyze the impact this will have on prior NUA elections. Let’s say a current
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retiree could have elected NUA and transferred shares in kind to a brokerage account in previous years, with the intent to sell some shares each year
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to diversify into other investments and maintain the capital gains benefit for these new investments. Shares in the brokerage account are not taxed as
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capital gains until sold, although dividends received will be taxed each year as received. Along comes Oracle with the $95 purchase price. Years
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later, all CER shares in the brokerage account will be sold, resulting in a potential large capital gains tax bite. Let’s say an individual had 20,000 CER
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shares with a cost basis of $20 per share from the prior NUA election, with these shares being sold at $95 per share.
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There will be a tax bill based on a $75 per share gain, which is the difference between the $95 purchase price less the
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$20 cost basis. The result is a $1.5 million gain, with a resulting $357,000 tax hit, which is simply the $1.5
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million times the capital gains rate of 23.8%. Although these types of events occur infrequently, it’s important to
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understand the impact should they happen, often years after your original NUA election. In our next episode, I will share strategies on how to diversify
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your brokerage account after an NUA election to minimize not only taxes but also protect against a future acquisition of
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the company. Until then, keep searching for opportunities to enhance your wealth.
