What does ‘In Specie’ mean
In specie is a phrase describing the distribution of an asset in its present form, rather than selling it and distributing the cash proceeds. In specie distributions are made when cash is not readily available or allocating the physical asset is a better alternative than distributing cash. In specie originates from Latin and stands for “in its actual form.”
Explaining ‘In Specie’
The types of assets exchanged in transactions can vary widely and act as substitutes for cash. Either physical assets or financial assets can replace cash with in specie transactions. Companies or individuals can distribute land, equipment or even inventory in lieu of cash for capital returns. Alternatively, financial assets such as stocks, bonds, warrants or other securities can be distributed instead of cash to shareholders in a capital return program. An example of an in specie distribution is a stock dividend, which can be distributed to investors when cash is in short supply. It is common to see an in specie distribution made in the form of fractional shares such as 0.5 shares for each share held.
Benefits of In Specie Distributions
Companies often buy other companies by issuing stock to the seller instead of paying in cash, or compensate sellers with some combination of the two. One of the reasons for doing so may be that cash is in short supply for the buyer and raising additional capital is not optimal. Another reason is for tax purposes; as a general matter, taxes are based on cash flows, and taxes are paid on gains when they are realized. Paying for a company or an asset in stock instead of cash makes gains for the seller unrealized; thus, sellers do not have to pay taxes until they sell the buyer’s stock after the transaction. Taxes usually have to be paid immediately for gains when they are realized or cash is accepted in a sale.
Example of an In Specie Transfer
Investors often hold securities in brokerage accounts or with financial advisors. If an investor wants to transfer those assets to another investment vehicle such as a trust, individual retirement account (IRA) or to another advisor, he can either liquidate the assets to realize the cash or transfer the assets to another account in specie. The latter avoids taxes and keeps the investor’s portfolio intact. Selling the assets for cash, however, will likely set in motion a taxable event with the investor paying capital gains taxes on any appreciation.
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