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Stock options and estate planning, P.1

How any given person's estate plan will turn out depends on a number of factors, including their family structure, their goals, and their assets. In the latter category, one of the often overlooked assts is stock options.

Many people own stock options, but in some cases they end up dying before they exercise their stock options. In cases where stock options are a large portion of the estate, this can mean significant losses. Here we'll take a brief look at some ways to handle stock options in your estate plan.

Before taking a look at possible ways to deal with stock options in an estate plan, it should be noted that there are two types of stock options plans: the Incentive Stock Option Plan (ISO) and the Nonqualified Stock Option Plan (NSO). An ISO is an option to purchase employer stock at a future date for the price that is in effect at the time the option is granted. An NSO, on the other hand, can be granted at any prices the employer determines.

If one decides to leave stock options to one's estate, whether ISO or NSO, one would need to ensure that the options can be exercised before they expire. To do this, one should provide their executor the authority to exercise the options and allocate the acquired stock among one's beneficiaries.

In addition, one should also be sure that one's executor is given either sufficient cash or authority to borrow enough funds to exercise the option. This way, the estate and one's beneficiaries do not get caught paying to exercise the options and decreasing the value of the benefit.

In our next post, we'll look at considerations to keep in mind for when you do not want to leave your stock options to your estate.

Source: northjersey.com, "Neumann: How to pass stock options to the next generation," Randy Neumann, February 9, 2012.

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