TL;DR
For tech professionals, effective tech industry estate planning is critical. A huge portion of wealth is in equity, but what happens to it at death is complex. Key issues include understanding vested vs unvested options, as unvested awards are usually forfeited. While transferring stock options is restricted, planning can designate a beneficiary for employee stock to avoid probate for stock options. Placing RSUs in a trust is a key strategy to avoid court, but it is often only possible for vested shares. Beneficiaries face significant tax implications of inherited stock, requiring careful Bay Area financial planning and robust estate planning for stock options.
What Happens to Your Stock Options and RSUs When You Die? A Guide to Estate Planning for Tech Executives
You built a career in the heart of innovation. The late nights, the relentless deadlines, and the big risks paid off. Now, a significant part of your net worth is tied up in equity compensation. Stock options and restricted stock units (RSUs) are not just lines on a brokerage statement; they represent your hard work and your family’s future. But a startling number of tech professionals overlook a critical question: what happens to that equity when you are gone?
The answer is far more complicated than most assume. Without a clear strategy, your loved ones could face a confusing legal battle, a crushing tax bill, and the potential loss of a fortune you spent a lifetime building. This is not a simple matter of naming someone in a will. The rules governing your equity are a complex web of corporate policies and tax laws. Effective tech industry estate planning requires a proactive approach to navigate these challenges and protect your assets. The first step is understanding what you own and what the rules are.
Vested vs. Unvested Options: The First Hurdle in Your Estate Plan
The most fundamental concept in planning for equity compensation is the distinction between vested and unvested awards. Vested options or RSUs are yours. You have met the company’s service requirements, and you have a right to them. Unvested awards, however, are merely a promise of future ownership. This distinction is the bedrock of estate planning for stock options.
Generally, if you pass away, your vested options can be transferred to your estate or a designated beneficiary. Your unvested options and RSUs, in most cases, are forfeited and returned to the company. Think of them as disappearing entirely. Each company’s stock plan document dictates the exact rules. Some plans may have provisions for accelerated vesting upon death, but you cannot count on it. Therefore, a primary goal of your planning should be to protect the value of what has already vested. This involves a careful review of your company’s policies before making any decisions about transferring stock options.
Navigating these corporate documents can be a challenge. If you are uncertain about your plan, Bay Legal PC can help. Our team advises on legal aspects to help avoid common pitfalls. To discuss your situation, call us at (650) 668 800, email intake@baylegal.com, or schedule a consultation via our booking calendar. Our office is located at 667 Lytton Ave, Suite 3, Palo Alto, CA 94301, United States.
Decoding Your Equity: Tax Rules for Inherited ISOs and NSOs
The complexity does not end with vesting. The type of options you hold, Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs), have different tax treatments for you and for your heirs. Understanding these differences is crucial for effective Bay Area financial planning. When your beneficiaries inherit vested NSOs, they generally do not owe income tax until they exercise the options. The value they recognize as income is the difference between the fair market value at exercise and the original grant price.
The tax implications of inherited stock for ISOs can be even more complex, often losing their preferential tax treatment after your death. Your beneficiaries need a clear plan to manage this sudden financial event, as the exercise of any option will trigger an income tax event for them. This is why a comprehensive approach to tech industry estate planning is so important. It involves not just legal documents, but also financial modeling and coordination with tax professionals.
Structuring your estate to handle stock options and avoid probate requires careful legal guidance. We can advise on a path forward. To get started, contact Bay Legal PC by emailing intake@baylegal.com, calling (650) 668 800, or using our online booking calendar to schedule an appointment. You can find us at 667 Lytton Ave, Suite 3, Palo Alto, CA 94301, United States.
Can RSUs Go in a Trust? Navigating Probate and Beneficiaries
One of the most common questions from tech professionals is whether they can place their equity into a living trust. Putting RSUs in a trust is a powerful strategy to avoid the lengthy, expensive, and public process of probate court. Probate for stock options can tie up your assets for months or even years, preventing your family from accessing their inheritance when they may need it most.
For vested RSUs and stock shares, transferring them to a trust is often straightforward. However, putting unvested RSUs in a trust is frequently prohibited by company policy. Most stock plans contain strict rules against transferring unvested awards. Attempting to do so could result in their forfeiture. A properly structured estate plan can, however, name a trust as the ultimate recipient of the shares once they are vested, a key strategy in planning for equity compensation.
Similarly, transferring stock options while you are alive is usually not permitted. Your estate plan must name a beneficiary for employee stock or direct the options into your estate, which can then be governed by your will or trust. This person will need the financial resources to pay both the exercise price and the resulting tax bill. Without proper Bay Area financial planning, your beneficiary might not be able to afford to exercise the options, forfeiting their value entirely.
The 2025 Tax Cliff: Why Your Estate Plan Needs an Urgent Review
Recent changes in federal law add another layer of urgency. As of 2025, major revisions to federal estate tax exemptions are expected. The current high exemption amount is set to be cut in half, which could expose many more Bay Area families to a substantial federal estate tax. This makes sophisticated estate planning for stock options more critical than ever.
Your equity compensation is a unique and powerful asset, but it comes with equally unique challenges. The rules are set by your employer, and the tax consequences are dictated by the government. Without a knowledgeable guide, you could be leaving your family’s financial security to chance. The decisions you make today about transferring stock options and planning for equity compensation will echo for generations. Your company’s stock plan document holds the key to your legacy, but without the right legal guidance, its terms could create unintended consequences for the people you care about most.
The upcoming 2025 tax changes make a plan review more critical than ever. Don’t leave your family’s financial security to chance. Schedule a consultation to discuss your planning needs using our booking calendar, by calling (650) 668 800, or emailing intake@baylegal.com. Our attorneys at 667 Lytton Ave, Suite 3, Palo Alto, CA 94301, United States, are ready to advise you on a course of action.
Frequently Asked Questions (FAQs)
1. What is the most critical part of estate planning for stock options?
The most crucial step is understanding your company’s specific plan rules. These documents dictate everything, from what happens to vested vs unvested options at death to the procedures for transferring stock options, forming the foundation of your entire strategy.
2. Can I put all my RSUs in a trust to avoid probate?
You can typically transfer vested RSUs and shares into a trust. However, most company plans prohibit putting unvested RSUs in a trust. This restriction makes avoiding probate for stock options a multi-step process that must be carefully managed in your estate plan.
3. What happens to my unvested options if I die?
In most cases, unvested options are forfeited and return to the company. Some plans allow for accelerated vesting upon death, but this is not standard. Proper planning for equity compensation means focusing on protecting the value of your vested awards first.
4. Who pays the tax on inherited stock options?
Your designated beneficiary for employee stock is responsible for the taxes. When they exercise the options, it creates a taxable event for them. Understanding the tax implications of inherited stock is a core component of responsible tech industry estate planning.
5. Why is Bay Area financial planning so important for equity compensation?
Because exercising inherited options requires cash for both the strike price and the immediate tax liability, without coordinated Bay Area financial planning, your beneficiary may lack the liquidity to exercise the options, potentially losing the entire value you intended for them.
6. Does a will automatically handle transferring stock options?
A will directs where the assets in your estate go, but the company’s stock plan rules take precedence. Your will can name who inherits the right to exercise, but the process for transferring stock options is ultimately governed by your employer’s policies.
7. How do I choose a beneficiary for employee stock?
Choose someone who is financially responsible and understands the steps required to exercise the options. Your estate planning for stock options should include educating your beneficiary on the process and the significant tax consequences they will face upon inheritance.
8. Is avoiding probate for stock options the main goal?
It is a primary goal to save your family time, money, and privacy. Using strategies like putting vested RSUs in a trust can achieve this. However, minimizing taxes and ensuring a smooth transfer are equally important parts of planning for equity compensation.
9. How do vested vs unvested options affect my estate’s value?
Vested options are an asset of your estate, while unvested options generally are not. This distinction dramatically impacts your taxable estate value and the inheritance your loved ones receive. This is a central issue in tech industry estate planning.
10. Are the tax implications of inherited stock the same for ISOs and NSOs?
No, they are different. Inherited ISOs often lose their favorable tax status and are treated more like NSOs. The tax implications of inherited stock are complex, and your plan must account for the specific type of equity you hold.
Attorney Advertising Disclaimer
This website and its contents are for informational purposes only and do not constitute legal advice. Prior results do not guarantee a similar outcome. Every estate planning matter is unique and depends on specific circumstances and applicable law. Viewing this site or contacting Bay Legal, PC does not create an attorney–client relationship. If you need legal advice, please schedule a consultation with a licensed attorney. Bay Legal PC is located at 667 Lytton Ave, Suite 3, Palo Alto, CA 94301, United States.