How are stock options handled in estate planning?

On Behalf of | Mar 10, 2023 | Estate Planning |

As stock options become more popular as part of employee compensation packages, people who aren’t traditionally wealthy must contend with how to deal with them. Stock options require extra care in estate planning. Some can be transferred to heirs; others will need deft arrangements, often performed while the individual is still alive.

Most stock options fall under two categories: Non-qualified stock options (NSOs) and Incentive stock options (ISOs). In all likelihood, you were provided with an accompanying breakdown of your stock options when you received them. If you don’t have that paperwork handy, here’s a quick overview: NSOs are subject to standard income taxes, and ISOs are subject to the alternative minimum tax system.

Giving away stock options while one is still alive

Unloading stock options while you’re alive creates a notable tax advantage. Instead of the recipient paying potentially heartbreaking federal estate taxes, the stock options will fall under the more digestible gift tax. Remember that the gift tax only applies to gifts up to $15,000 per person (or $30,000 per couple) annually.

Two exceptions to the $15,000 annual gift tax ceiling exist: directly paying off someone’s college tuition or paying for medical expenses. These are considered excludable transfers.

Furthermore, these stock options don’t necessarily need to be given to an individual. If several heirs are in the picture, you can park them in a trust or family limited partnership. This also allows you to maintain a certain amount of control over how the stock options are used or exercised, even though they are no longer strictly yours.

Exercising nontransferable stock options

Nontransferable stock options expire upon the holder’s death, which can be a massive financial loss for your heirs if your death is sudden or unexpected. These, obviously, cannot be included in your estate plan, so plan accordingly.

Indeed, these stock options tend to have several restrictions, so it’s a good idea to become familiar with their limitations as early as possible.

Finally, some stock options are only transferable to immediate family members. Depending on your family dynamic, you’ll want to account for these carefully.

The information presented here is only the tip of the stock options estate planning iceberg. Unless you’re confident in this field, you’ll want the guidance of an estate planning attorney to minimize problems and tax burdens for your heirs.


E-mail Cushing & Dolan

Articles By Our Attorneys


Cushing & Dolan, P.C. | Attorneys At Law

FindLaw Network