If you have spent your career in a high-risk, high-reward sector, such as technology, you have likely received stock incentives as part of your compensation package. Companies often motivate and reward executives by awarding them restricted stock, restricted stock units (RSUs), or stock options. Which one you might have received depends on the sector you have been involved in and on the stage of your company’s lifecycle, among other factors.
Over the years, the accumulation of such incentives sometimes become the vast majority of one’s personal wealth. A highly concentrated portfolio of this nature presents unique wealth management challenges, particularly related to taxation. In this note and others in Cresset’s forthcoming series, we will provide food for thought on some of the key issues related to your incentive stock holdings.
Bearing in mind that even incentive plans of the same general type can differ significantly from each other, we review here the three basic categories that you might have received.
Restricted Stock is physical shares in a company that must vest, subject to a hurdle such as performance or time, before you become their owner and benefit from shareholder rights. When the shares vest, you must pay ordinary income tax on their current value at the applicable marginal rate. Restricted stock is eligible for Section 83(b) tax treatment, which can reduce the amount of taxes owed by allowing you report the shares on their grant date rather than their vesting date.
Restricted Stock Units are a promise to give shares (or, sometimes, cash) to an employee in the future, subject to vesting requirements. You have no shareholder rights until, and only if, shares are awarded at vesting. The shares are valued as common stock and will be taxed as regular income on vesting. Because the IRS does not classify RSUs as tangible property, they are not eligible for 83(b) election.
Stock Options represent a possible opportunity to buy shares in the company at a pre-determined (“strike”) price by a pre-determined date. If the share price does not equal or exceed the strike price by the expiration date, the options expire worthless. Stock options are a statutory instrument, meaning you will owe taxes only when the shares are sold, not when the option is exercised.
Ownership or pending ownership under each of these schemes have significant tax implications. Cresset can help you to navigate the complexities of your company’s incentive plan and determine the most tax-efficient approach to your awards, enabling you to minimize current and future tax liabilities and maximize the upside from your years of hard work.
Contact us to explore your options at firstname.lastname@example.org.