Reverse Morris Trust
Candlefocus EditorAt the heart of a Reverse Morris Trust is a parent corporation that wants to separate certain assets from their core business. The parent company usually has a substantial amount of internal resources, including stockholders, equipment, and inventory. It then divides these assets among a new company or a third-party competitor with whom it wishes to strike a deal. Stockholders of the parent company are given at least half of the voting rights and 50.1% of the merged entity’s asset value. The remaining stock in the new entity is typically held by the third-party or new company.
The main advantage of a Reverse Morris Trust is that the parent company can move its assets without facing the risk of incurring a large tax bill. After a Reverse Morris Trust is completed, the parent company can be liable for up to 19% capital gains taxes on the portion of its assets sold to the third-party or new company. This is significantly lower than the rate at which the parent company would be taxed if the assets had been sold in their entirety.
Another benefit of a Reverse Morris Trust is that it allows the parent company to maintain control over the assets it has spun off. Because the parent company holds a majority stake in the merged entity, it can retain operational decisions regarding the assets it has spun off. This means that the company can still benefit from the assets while transferring those assets to other firms that can leverage the dealt assets more efficiently.
Overall, Reverse Morris Trusts are an important tool for major corporations wishing to restructure their assets without incurring heavy taxes. However, companies must be proactive when engaging in such a maneuver and understand the various tax requirements before proceeding. Additionally, as with any major corporate decision, companies should be sure to consult a CPA or other financial professional in order to ensure that their decisions are legally permissible and ultimately beneficial for all entities involved.