Stock options are becoming an increasingly popular employment benefit in addition to compensation. They essentially grant employees the option to buy or sell stock in the company for a set price, at a specified point in the future. Stock options represent an excellent opportunity to accumulate wealth -- and like most investments should be included in your long-term financial plans.
When it comes to Estate Planning and Stock Options, there are a few important things to consider. It is crucial to know if and when your options can transfer, as well as whether or not they will expire upon death. By including stock options in your Estate Plan, you can take full advantage of this employment benefit and pass on the financial reward to your loved ones. If you are curious about how to include stock options in your Estate Plan, the following guide will provide you with more information:
How to Include Stock Option in an Estate Plan
You should treat stock options like any other financial asset or investment, and include them in your Estate Planning process. The first step in doing so is to determine which type of options you have, and whether or not they can be transferred to an heir or pass through an Estate Plan. There are two main types of stock options: Incentive stock options (ISOs) and Nonqualified stock options (NSOs). The two types are treated differently for tax and Estate Planning purposes.
The biggest distinction between the two types of stock options has to do with tax law. ISOs and NSOs are taxed differently at the time they are exercised. Generally speaking, ISOs are taxed according to the alternative minimum tax system, while NSOs are subject to regular income taxes. These differences will make more sense as you work with an Estate Planning lawyer and manage the future of your financial assets. Remember that your company will provide you with information on the specifics of your stock options at the time they are granted.
How to Transfer Stock Options
There are a few different ways you can approach Estate Planning and stock options. The most common Estate Planning strategy when managing stock options is to give ownership of these assets to an heir while the holder is still alive. This method will reduce the holder’s taxable Estate, and therefore decrease the amount owed after they are deceased. The reason for this is because stock options (and even stocks) are an asset that generally appreciate in value. By giving the assets away as a gift in your lifetime, the options would be subject to Gift Tax rules instead of Estate Taxes -- generally resulting in less taxes owed.
Stock option holders can also choose to transfer these assets into a Trust or family limited partnership as part of their Estate Plan. This can allow the original option holder to set conditions on the usage or exercise of the stock options. Read this article to learn more about transferring options into a Trust. Remember that the best way to maximize the benefits of your stock options through Estate Planning is by working with a Tax Planning and Estate Lawyer. They will be able to advise your decisions and ensure you receive the most financial benefits from the options.
Are all Stock Options Transferable?
Unfortunately, not all stock options are transferable -- meaning you can not leave unexercised options to a loved one in your Estate Plan. In these cases, the stock options would expire at the time of your death. Even if your stock options are transferable, some companies limit who they can be transferred to. For example, some corporations only allow immediate family members to receive or inherit stock options. In these cases it is important to consider when you want to exercise the options yourself as part of your Estate Plan.
Commonly Asked Questions about Estate Planning and Stock Options
While stock options are an excellent investment opportunity, they can be tricky to understand in terms of Estate Planning. Read through the following commonly asked questions for more information about estate planning and stock options.
Do Stock Options Expire When You Die?
There are some situations where stock options expire upon the death of the holder. In these cases, the options cannot be inherited by a loved one -- even the holder’s spouse. When you are granted stock options by an employer, they should provide you with information on whether or not they expire after death.
What Happens to Stocks If You Die?
If you exercise your stock options and choose to hold the stocks in your company, they will be treated differently when it comes to probate. Generally speaking, stock ownership will be granted to the surviving spouse. In these cases, the stocks would avoid going through probate with your Estate and instead pass through after the death of your spouse (unless they were otherwise sold or given away).
Can You Leave Stock Options To Charity?
You can give stock options to a charity, though this strategy is not considered tax-forward in Estate Planning. The reason for this is because upon transferring the options, you will benefit from a charitable deduction and still be responsible for income taxes on the options when they are eventually exercised. In most cases, the income tax will be larger than the potential deduction you could receive. There are several ways to include a charitable organization in your Estate Plan if you are interested in doing so.
How Are Stock Options Taxed In An Estate Plan?
Stock options are not taxed until the holder decides to exercise the options. If you have gifted your stock options to a family member as part of an Estate Plan, they can decide when to exercise them. At that point, you (the original option holder) would be responsible for paying income taxes on the spread.
The right Estate Planning can help you minimize the amount of taxes your stock options are subject to -- whether you decide to exercise them yourself or transfer the options to a loved one. It is recommended to begin thinking about your Estate Plan as soon as you are presented with stock options, that way you can be sure to maximize the potential financial benefit.
Stock options are an excellent addition to employee compensation, but they can be somewhat intimidating to plan for. There are a few different ways to approach estate planning and stock options, and our team at Trust & Will is here to help. Whether you want to pass the options on to a loved one, place them in a Trust, or simply avoid letting them expire before you exercise them -- we can help you take the appropriate steps. When utilized correctly, stock options can be an excellent way to accumulate wealth. If you are granted the opportunity to invest in stock options, remember not to let it pass you by. If you have any questions we didn’t answer: Reach out to us today or Chat with a live member support representative!
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