Maximize Wealth Retention with a Variable Prepaid Forward Contract

Discover how variable prepaid forward contracts can help stockholders defer capital gains taxes while securing liquidity from their investments.

A variable prepaid forward contract is a powerful strategy used by stockholders to access liquidity from their shares while deferring the taxes owed on capital gains. Although the sale isn’t immediately finalized, stockholders still collect the cash upfront.

Unlock the Benefits of a Variable Prepaid Forward Contract

This method is particularly beneficial for investors with a significant holding in a single company’s stock, like founders or top executives, who seek liquidity while delaying taxable events.

Realizing Opportunities with a Prepaid Variable Forward Contract

For example, imagine a corporate founder who has accumulated a substantial amount of company stock. This individual might desire to diversify their holdings, lock in profits, or simply raise cash—all while postponing the associated tax obligations.

Key Takeaways

  • Deferred Tax on Capital Gains: This strategy enables large shareholders to turn their stocks into cash while postponing the taxes until a later date.
  • Unfinalized Sale: The sale is not finalized immediately, which can be advantageous for holders of stock options or restricted shares with future exercise dates.
  • IRS Scrutiny: The strategy often draws attention from the IRS and may be viewed as controversial.

How It Works

By entering a variable prepaid forward contract, an investor sells the stock to a brokerage company and receives 75% to 90% of its current value upfront. The transaction remains unfinalized until a future date, deferring the tax on capital gains. When the contract finalizes, the investor can deliver the shares or the cash equivalent at a pre-set price range, protecting against significant losses.

This contract is especially useful for executives restricted from selling their stock options immediately or when large insider sales could negatively impact market perception. It effectively circumvents these issues while providing significant financial flexibility.

Built-in Protections

  • Price Protection: The contract includes a floor and ceiling price, offering downside risk mitigation and upside potential if the stock drastically increases in value prior to finalization.
  • Controversial yet Effective: Some criticize this strategy as potentially inappropriate tax deferral. Nonetheless, it remains a popular method among high-net-worth individuals looking to optimize their financial standing.

Coca-Cola’s Collateral

In essence, a prepaid variable forward contract encapsulates the elements of a collar strategy, merging a long put option and short call option with the aspect of loan monetization against the underlying security. Once considered sophisticated, this strategy has now gained traction thanks to financial engineering advancements.

Financial moves like these are not without public and regulatory scrutiny. Notably, in 2011, Ronald Lauder—heir to the Estée Lauder fortune—received media attention for utilizing a prepaid variable forward contract to efficiently shelter his wealth, a clear indication of why these high-level strategies draw IRS and journalistic attention.

For investors seeking to maximize wealth retention while deferring tax liabilities, the variable prepaid forward contract presents a flexible and formidable option, albeit one that demands careful planning and consideration.

Related Terms: collar strategy, put option, short call option, executive compensation, investment diversification.


  1. The New York Times. “A Family’s Assets, Artfully Sheltered”.

Get ready to put your knowledge to the test with this intriguing quiz!

--- primaryColor: 'rgb(121, 82, 179)' secondaryColor: '#DDDDDD' textColor: black shuffle_questions: true --- ## What is a Variable Prepaid Forward Contract (VPFC)? - [ ] An agreement to sell an asset at a fixed rate in the future - [x] A method for an investor to sell securities for cash today and buy them back later at a variable price - [ ] A swap agreement involving currency exchange - [ ] A method to convert equity into fixed income assets ## What are VPFCs typically used for? - [ ] Speculative trading in commodities - [ ] Buying international currencies at a forward rate - [x] Hedging and liquidity management for concentrated stock holdings - [ ] Creating a new stock portfolio ## Which tax treatment typically applies to VPFC proceeds? - [ ] Ordinary income - [x] Deferred capital gains tax - [ ] Tax-free - [ ] Dividend income ## Who often uses VPFCs to manage their financial risks? - [ ] Bond issuers - [ ] Small retail investors - [ ] Commodity traders - [x] Company executives with restricted stock holdings ## What is one key feature of a variable prepaid forward contract? - [ ] The obligation to provide fixed returns - [ ] The elimination of market risk - [x] The ability to defer capital gains taxes until the securities are actually sold - [ ] Locking in the current stock prices for the future ## How does a VPFC provide liquidity? - [ ] Through immediate tax rebates - [ ] By producing periodic dividend income - [x] By allowing an investor to receive cash upfront - [ ] By leveraging fixed interest rates ## Which of the following is an advantage of VPFCs? - [ ] Simplified tax filing - [ ] Guaranteed future profits - [x] Flexibility in meeting future sale obligations - [ ] Preventing any loss ## What aspect of VPFCs might be particularly beneficial to executives with restricted stock? - [ ] Enhancing voting rights - [ ] Giving up control of company shares - [x] Avoidance of mandatory stock sale during blackout periods - [ ] Ensuring stock price appreciation ## What type of collateral is involved in most VPFCs? - [ ] Foreign currency notes - [x] A portion or all of the investor’s stock holding - [ ] Corporate bonds - [ ] Real estate assets ## What potential downside is associated with VPFCs? - [ ] Enhanced liquidity risk - [x] Obligation to fulfill contracts might apply even if the stock's price drops - [ ] Complete elimination of risk - [ ] Increased taxable income