What Happens to Stock Options When Someone Dies?

Stock options can be a significant part of an individual’s financial portfolio, offering the potential for substantial benefits. However, what happens to these stock options when the holder passes away? Understanding the process and implications is crucial for beneficiaries to manage these assets effectively.

1. Understanding Stock Options

Stock options are contracts that give the holder the right, but not the obligation, to buy or sell a stock at a predetermined price within a specific time frame. There are two main types of stock options:

• Incentive Stock Options (ISOs): Typically offered to employees, ISOs provide favorable tax treatment but come with strict holding requirements.

• Non-Qualified Stock Options (NSOs): Can be granted to employees, directors, contractors, or others, with different tax implications compared to ISOs.

2. Company Policies and Plans

Each company has specific policies and plans governing what happens to stock options upon the death of the holder. It’s essential to review the company’s stock option plan documents, which outline the rules and procedures. Common scenarios include:

• Immediate Vesting: Some companies may allow unvested stock options to vest immediately upon the holder’s death.

• Extended Exercise Period: Beneficiaries might be granted an extended period to exercise the options, often ranging from 6 to 12 months or longer.

• Forfeiture: In some cases, unvested options may be forfeited upon death.

3. Role of the Executor

The executor of the estate plays a critical role in managing the deceased’s stock options. The executor’s responsibilities include:

• Reviewing the Will and Estate Plan: The will and estate plan should provide guidance on the distribution of stock options.

• Contacting the Company: The executor must notify the company of the option holder’s death and understand the specific procedures and timelines for exercising the options.

• Valuation and Tax Considerations: The executor must determine the value of the stock options and consider any tax implications.

4. Beneficiary Rights and Actions

Beneficiaries named in the will or designated through the stock option plan need to understand their rights and the steps required to manage the options effectively.

• Documentation: Provide necessary documentation, such as the death certificate and proof of beneficiary status, to the company.

• Decision to Exercise or Sell: Decide whether to exercise the stock options, sell the shares immediately, or hold onto them. This decision should be based on the stock’s performance, market conditions, and personal financial goals.

5. Tax Implications

The tax implications of inheriting and exercising stock options can be complex and vary depending on the type of option and timing of exercise:

• ISOs: If the stock options are ISOs, exercising them may trigger Alternative Minimum Tax (AMT). If the shares are sold within a year of exercise or two years from the grant date, it may result in a disqualifying disposition, affecting tax treatment.

• NSOs: Exercising NSOs results in ordinary income tax on the difference between the exercise price and the fair market value at the time of exercise. Subsequent sales of the shares are subject to capital gains tax.

6. Consulting Professionals

Given the complexity of managing and exercising stock options after someone’s death, consulting professionals such as estate attorneys, financial advisors, and tax experts is highly recommended. These professionals can provide guidance tailored to the specific circumstances and ensure compliance with legal and tax requirements.

Conclusion

Managing stock options after the death of the holder involves understanding the company’s policies, legal implications, and tax consequences. Executors and beneficiaries must carefully review the terms of the stock option plan, consider their financial options, and seek professional advice to navigate this complex process effectively. Proper handling of stock options can help maximize their value and ensure they are managed in accordance with the deceased’s wishes.