Learn about the role equity compensation can play in your estate and legacy planning, and how proper planning can help ensure a smoother transition of assets to the ones you love.
You probably have some ideas about how to put the equity compensation awards that you’ve received at work to use. These might include building an emergency fund, buying a home, paying down debt or bolstering your retirement savings.
They’re all great options, but if you’re already on track to meet most of your short- and long-term financial goals, it may be time to think about how equity compensation may fit into your estate and legacy planning in order to help benefit your loved ones, now and in the future.
Your first reaction may be, “Isn’t estate planning only for wealthy or elderly people?” This is a common misconception. In reality, almost everyone needs some form of estate plan, which can consist of a will, trust(s) and gifting strategies. Thoughtful planning helps ensure that assets end up with the people and organizations you care most about—and that they are used for the purposes you intend, like assisting adult children in purchasing a first home or helping grandchildren pay for college.
Let’s take a look at a few of the most important considerations when factoring equity compensation into your legacy and estate planning.
Understand exactly what kind of equity compensation holdings you have, because this can impact how—or even if—they can be transferred.
Take stock of what you own.
Start with the basics. It’s important to understand exactly what kind of equity compensation awards you have, because this can impact how—or even if—they can be gifted or left to loved ones. For example, grants of stock options and restricted stock units (RSUs) typically can’t be transferred while they’re unvested, but shares purchased via an employee stock purchase plan (ESPP) or RSUs that have vested are commonly transferrable to another party.
Stay on top of vesting schedules.
Because you generally can’t transfer equity compensation grants that are unvested, always be aware of the vesting schedule associated with your grants. You should also ask your employer about whether your equity award is transferable when it is vested—and whether your vested stock options are transferable if they’re not exercised. Every company has its own rules about how, when and to whom shares received from equity compensation may be transferred.
Don’t leave the beneficiary box blank.
Some equity compensation plans allow you to name a beneficiary of your equity compensation grants. Depending on plan rules, this person or entity may be able to initiate action on your grants, such as exercising stock options or selling shares, once you pass away. You should make sure to tell your beneficiary that you have selected them and provide them with the account and contact information they will need should something happen to you.
Know your (gifting) limits.
If you have the means, transferring wealth to a family member while you’re still living may help the recipient with a shorter-term need. But there are additional practical benefits, such as removing the assets from your taxable estate. For 2022, federal law permits annual gifts of up to $16,000 to an unlimited number of individual recipients (up to $32,000 for married couples electing to split gifts), and these annual gifts are excluded from the federal gift tax.1
Keep your loved ones informed.
Research shows that many parents feel uncomfortable discussing financial matters with their children. But communicating your plans and intentions openly can help your family be better prepared. You’ll especially want to have conversations with the person you have selected to act as your executor in order to help ensure a smooth transition.
Organize key information.
Creating a file of your equity compensation information is another way to help reduce the burden on family members. When it comes time to carry out your wishes, your executor will be able to access contact information for your workplace, attorney and accountant or Financial Advisor, and easily locate your equity award documents.
Remember to plan for taxes.
Make sure to understand and plan for estate, gift and other potential taxes, and remember that you and your beneficiaries may be subject to them. Tax treatment will vary based on the type of equity compensation you have, how long shares are held, the price per share of the underlying stock, and other factors. Consult your plan documents and talk to a tax advisor to better prepare for your potential tax obligations.
Look to the professionals for help.
When it comes to equity compensation and estate planning, remember these key points:
- You can generally gift vested shares but not unvested holdings.
- Vested shares are sometimes transferrable, but make sure to check the details of your company’s plan.
- Naming a beneficiary or beneficiaries can help make the transition of assets easier and empower family members to take action.
- Once awards are vested and or/exercised, careful estate planning decisions can ensure that your money is paid out in accordance with your intentions.
Estate and legacy planning decisions involving your equity compensation can be complex, so it’s a good idea to enlist the support and guidance of an experienced Financial Advisor, along with a trusted estate planning attorney and tax professional.
Your Financial Advisor can also help you get a better understanding of how your equity compensation and workplace benefits fit into your overall financial picture.
Learn more about equity compensation and how Morgan Stanley can help you make the most of yours.