Employees and executives may accumulate substantial wealth through restricted stock, restricted stock units, and stock options. These forms of compensation do not always transfer like ordinary brokerage investments after death.

For families in Los Angeles County, understanding the terms of equity compensation can be an important part of coordinating an estate plan.

Understanding the Different Assets

Restricted stock, restricted stock units, incentive stock options, and nonqualified stock options have different contractual and tax characteristics.

Some interests represent shares already owned, while others represent a contractual right to receive or purchase shares after specified conditions are satisfied.

The distinction matters because ownership, vesting, exercise deadlines, and transfer restrictions can determine whether an asset has value after death.

Reviewing the Equity Compensation Plan

Employers commonly establish written equity incentive plans and individual award agreements. Those documents may address what happens upon retirement, incapacity, termination of employment, or death.

Unvested awards may expire, accelerate, or receive other treatment depending on the documents.

Stock options may also have a limited period during which an estate or authorized successor can exercise them. Missing an applicable deadline may result in the loss of a valuable right.

Coordinating the Trust and Beneficiary Designations

Transferring stock into a revocable trust may be possible in some circumstances, but employer-imposed transfer restrictions must be considered.

An employee should not assume that every equity award can be assigned to a living trust. Some interests may pass under the compensation plan rather than through a trust or will.

The estate-planning attorney should coordinate with the employer's benefits administrator and the individual's tax adviser.

Valuation and Tax Questions

Equity compensation can create complicated income-tax and estate-tax issues. The treatment of an award may depend on its type, exercise history, vesting status, and whether income is recognized after death.

Tax planning should account for both the value included in the estate and the potential income-tax consequences to beneficiaries.

Key takeaways

• Review every equity plan and award agreement for transfer and death provisions.

• Identify post-death exercise deadlines and vesting requirements.

• Coordinate legal ownership, succession provisions, and income-tax treatment.

California stock option estate planning requires reviewing the actual compensation documents. A conventional will or living trust may not fully address the restrictions imposed by an employer.

This article provides general information, not legal advice. For questions involving equity compensation and estate planning, call Westlake Law Group at (818) 444-2022. 30699 Russell Ranch Road, North Building, Suite 210, Westlake Village, California. Virtual consultations are available throughout Southern California.

Educational links:

• https://www.irs.gov/

• https://www.investor.gov/

• https://leginfo.legislature.ca.gov/faces/codes.xhtml