Business Sale via Employee Stock Option Plan Transaction

This case study is based on an actual engagement with a Cerity Partners client. Facts and identifying details have been altered, generalized, or omitted to protect client confidentiality. This client’s experience is not representative of the experience of other clients and should not be viewed as an indication or guarantee of similar results. This description does not constitute a testimonial or endorsement of Cerity Partners’ advisory services.

The situation

After decades of building a successful privately held company, the owner decided to transfer ownership through an employee stock ownership plan (ESOP). This transaction provided liquidity for the owner, rewarded employees who helped build the company, and allowed the business to continue operating independently.

It also introduced complex decisions about estate planning, capital gains taxes, investment strategies, charitable giving, family governance, and long-term wealth transfer. The client didn’t need a collection of unrelated recommendations; the family needed a coordinated strategy that started before the transaction and continued far beyond the closing.

Planning before the transaction

We recognized that many of the most valuable planning opportunities arose before the sale was completed.

We identified an opportunity to transfer a portion of the company’s future appreciation outside the client’s taxable estate. We coordinated this planning with the client’s estate attorneys, tax advisors, and valuation professionals.

With their guidance, the client established spousal lifetime access trusts and transferred company shares to these trusts before the transaction.

Because the company was privately held and its shares weren’t publicly traded, an independent appraisal was conducted, taking into account specific features of the transferred interests, such as limitations on control and marketability.

The planning was designed to:

• Transfer future appreciation outside the client’s taxable estate;
• Use the available gift and estate tax exemption more efficiently;
• Establish long-term trusts for the benefit of the client’s family;
• Position a portion of the eventual sale proceeds within multigenerational planning structures; and
• Preserve appropriate flexibility under the terms of the trusts.

This strategy required careful coordination among the family, attorneys, tax professionals, appraisers, and transaction advisors. Outcomes depended on specific facts, timing, documentation, and applicable law.

The three-part tax management strategy

After completing the estate planning, we helped the client and advisors develop a three-part strategy to manage the capital gains from the sale.

1. Section 1042 election and qualified replacement property

The first component involved a Section 1042 election in connection with the ESOP transaction.

Working with the client’s tax and legal advisors, a portion of the proceeds was reinvested in qualified replacement property. This structure—subject to requirements—allowed the client to defer recognition of eligible gains from the sale.

Instead of paying the entire capital gains tax immediately, the client retained more capital for investment and long-term planning.

2. Tax-aware investment management

Most of the remaining proceeds were allocated to a customized, tax-aware equity strategy.

This strategy aimed to maintain broad equity market exposure and capture market benchmark returns while systematically seeking opportunities to harvest investment losses. These losses could potentially offset capital gains elsewhere in the family’s portfolio, including those from the business transition.

Our modeling showed that this strategy could offset a substantial portion of the client’s original capital gain over time. The actual results would depend on market conditions, portfolio activity, available gains, tax laws, and the client’s circumstances.

3. Creating a family charitable foundation

Charitable giving was already a top priority for the client and family, so we incorporated philanthropy into the transaction planning from the start.

Working with the family’s legal and tax advisors, the client established and funded a private charitable foundation.

By contributing appreciated assets to the foundation, the family supported its philanthropic goals, potentially reduced capital gains exposure on donated property, and received a charitable income tax deduction (subject to valuation requirements and limits).

The foundation also provided an enduring benefit beyond tax advantages. The client’s children became actively involved in the foundation, helping to:

• Establish charitable priorities;
• Evaluate organizations and grant requests;
• Participate in funding decisions;
• Oversee the family’s philanthropic mission; and
• Develop experience managing a significant family responsibility.

The foundation gave the next generation a meaningful role and created a structured way for the family to collaborate around shared values.

Coordinating the broader family strategy

Estate and tax strategies were only part of our engagement. Our family office team also assisted the client with:

• Establishing reserves for spending, taxes, and future commitments;
• Developing a diversified investment allocation across public and private markets;
• Coordinating the investment strategy with the Section 1042 and charitable planning;
• Reviewing the family’s estate planning following the significant liquidity event;
• Evaluating additional wealth-transfer opportunities;
• Reviewing insurance, asset protection, and liability exposures;
• Coordinating the work of attorneys, accountants, trustees, appraisers, insurance professionals, and investment managers; and
• Creating consolidated reporting and an ongoing process for managing the family’s affairs.

The outcome

The family transitioned from owning a concentrated private business to managing a diversified, tax-aware, multigenerational wealth strategy. The coordinated planning aimed to:

• Move future appreciation on transferred shares outside the client’s taxable estate;
• Use the available gift and estate tax exemption more efficiently;
• Defer eligible capital gains through a Section 1042 qualified replacement property structure;
• Create the potential to offset additional gains through tax-aware investing;
• Advance the family’s charitable mission;
• Give the client’s children meaningful philanthropic leadership responsibilities; and
• Integrate investments, taxes, estate planning, risk management, and family governance into one ongoing plan.

The results depended on the client’s unique circumstances, professional valuations, transaction structure, market performance, tax laws, and successful implementation of each component.

The family office difference

A business sale is more than an investment event—it’s often when a business owner’s entire financial life changes.

The planning window may be short, decisions are interconnected, and many opportunities exist before a transaction is completed.

Our role went beyond investing sale proceeds. We identified pre-transaction planning opportunities, coordinated the family’s professional advisors, evaluated tax management strategies, structured the investment portfolio, advanced the family’s charitable objectives, and created a framework for managing wealth across generations.

For more information, visit our practice page or call 312-715-3814.

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The tax and estate strategies described, including spousal lifetime access trusts, the Section 1042 qualified replacement property election, and the family charitable foundation, involved complex legal and tax considerations specific to this client’s facts and applicable law at the time of the transaction. Outcomes for other clients will vary based on individual circumstances, and any similar strategy should be reviewed with qualified tax and legal professionals.

Cerity Partners, LLC (“Cerity Partners”) is an SEC-registered investment adviser with offices across the United States. Registration as an investment adviser does not imply any level of skill or training. The information provided is not intended as personalized investment, tax, or legal advice. There is no guarantee that any opinions, projections, or views expressed will materialize. You should consult a qualified professional before making financial decisions. Information is subject to change without notice and is believed to be reliable but is not guaranteed. For Cerity Partners’ registration status, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov. For additional details about our services, fees, or potential conflicts of interest, please request our disclosure statement, including Form CRS and ADV Part 2, using the contact information provided.