ARBOR WEALTH: Hank Williams, Don Sterling and capital gains pain

Published: Wednesday, June 18, 2014 at 05:21 PM.

Your cheatin’ heart … will make you weep…” from “Your Cheatin’ Heart” by Hank Williams


Donald Sterling has now reneged on his agreement to sell the Los Angeles Clippers.  Perhaps he changed course when he saw his impending tax bill.

I’m not a basketball fan, but when I heard that a professional basketball team was selling for $2 billion, I wondered how much the seller would actually clear after taxes.

Astute advisors consider similar situations daily on behalf of their clients. How much will the client clear if a holding is liquidated? Or, how much will a client take home if he sells his business? After all, it’s not what you gross, it’s what you make after you settle with Uncle Sam that actually matters. Employing investment strategies that neglect a client’s tax considerations can be detrimental to the client’s finances.

I read recently about a client who changed financial advisors. The new advisor perused the client’s portfolio, saw heavy allocations in one particular dividend-paying utility stock, and immediately sold the majority of the security. Turns out the client had held the stock for several decades and had originally purchased it at a rock bottom price. Because the stock had grown significantly in value, the capital gains taxes were exceptionally burdensome. 

Back to basketball. Mr. Sterling was reportedly selling the L.A. Clippers to former Microsoft Chief Steve Ballmer for $2 billion. Sterling bought the team in 1981 for $12.5 million dollars, so the franchise has increased in value by $1,987,500,000. 

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