Stock options that you hold when you die can be taxed twice. First, under the federal estate-tax rules, the value of any vested but unexercised stock options will be included as part of your gross estate for estate-tax purposes. Second, if your personal representative or your beneficiary exercises the options, the income arising from the exercise will be taxed under the federal income-tax rules. The timing of the exercise affects the tax reporting.
Understanding the tax complexities can affect your estate's or beneficiaries' choices about when to exercise the options and sell the stock. You may want to consult an experienced financial advisor. The tax treatment for nonqualifed stock options (NQSOs) is different than the treatment for incentive stock options (ISOs).
See other FAQs on this website for the tax treatment of restricted stock and employee stock purchase plans after death.