Financial Planning: High Net Worth
Articles (Jump to FAQs)
Robert Gordon
Understand the key issues and limits of hedging NQSOs, including company, SEC, and tax law constraints. Then you can analyze potential hedging strategies for your stock options, such as collars.
Robert Gordon and Charlotte Lyman
Market volatility has made many high-net-worth executives want to hedge their exposure to concentrated positions in company stock. Unfortunately, most of the tools for hedging are not very efficient with NQSOs. Part 2 in this series examines alternative approaches.
Mark Miller
For employees and executives, international travel and relocation are increasingly common. Taxation for "mobile employees" is always complex, and never more than with equity compensation. This article explains the key rules in cross-border situations.
Robert Gordon and Charlotte Lyman
Hedging stock from exercises of incentive stock options (ISOs) is complex, but it is possible in certain situations. Financial engineering can create a floor under the ISO stock while letting the capital gains holding period continue.
Robert Gordon and Charlotte Lyman
Your company stock represents a large, concentrated portion of your wealth, making you nervous. You want to protect your gains and get your hands on some money.
Robert Gordon and Charlotte Lyman
After understanding hedging basics, you need to answer a few questions and decide whether your goals go beyond risk reduction to liquidity creation.
Robert Gordon and Charlotte Lyman
UPDATED! After learning the basic rules and restrictions, you now need to decide on the appropriate hedging tool and understand variable forwards and the final issues to consider in crafting your hedging strategy.
Alisa J. Baker
You may find a gap between what you expect from your equity compensation and what you receive. Often the problem stems from the complexity of the related documents and rules. Learn about them, and understand why you must focus on conflicting or inconsistent provisions.
Alisa J. Baker
NEW! Part 1 looked at the problems of conflicting or inconsistent provisions among different documents. Part 2 discusses which existing documents and rules nonfounder executives must consider when negotiating for equity compensation during the early (pre-public) stages of a company's development and growth.
Carol Cantrell
NEW! You have stock options with a large spread, don't need the money, and want to defer the tax upon exercise as long as possible. But you also want to minimize the risk of owning a single stock. Learn about the possibility of substituting a nonqualified deferred compensation plan for your unexercised options.
Martin Nissenbaum
UPDATED! Finding legal techniques to minimize taxes is almost as popular in the US as stock options. Sophisticated techniques with founders' stock and options can avoid or defer taxation.
Martin Nissenbaum
You want to defer gain on the sale of publicly traded securities, but they do not qualify as qualified small business (QSB) stock. Here's another way to defer tax on those holdings.
Gretchen Morgenson and Eric Dash
The New York Times, 10/15/06
This interactive graph shows the 2005 compensation of the highest-paid CEOs in the US. A chart shows the stock option gains of the top group. (Registration is required.)
Ronald Fink
CFO, April 2006
The usual ways in which high-net-worth executives diversify stock or defer taxes, including prepaid forward contracts, equity collars, exchange funds, or charitable remainder annuity trusts, all raise tax issues or other concerns. Some experts suggest that, with capital gains rates so low, it's better to just sell now.
Geoffrey Colvin
Fortune, 3/21/05
Next time you encounter a too-good-to-be-true strategy related to your company stock that greatly reduces taxes and puts money in your pocket, consider this tale of how the IRS caught up with many too-clever executives and charged them for tax evasion. (A subscription is required.)
Alyn Ackermann
Financial Advisor, 9/04
Executives with both concentrated positions in company stock and retention requirements need to understand the risks and strategies.
Internal Revenue Service
The IRS tips its hand on what its agents look for in audits related to all types of stock pay to ensure compliance, whether by corporations or executives.
Thomas Meagher, Terry Adamson, Donald Harrington, and Lee Nunn
Tax Management Compensation Planning Journal, May 2004
The IRS is focusing attention on eight areas of executive compensation, including equity compensation. Although its emphasis in stock compensation is on companies' deduction timing, reporting of income, and tax withholding, any problems found in company audits will affect you. (To view this you need the Adobe Acrobat Reader, which you can obtain free
here.)
Bernard Condon
Forbes, 7/5/04
Before you jump to the newest hedging strategy for your concentrated company stock position, beware of mistakes other sophisticated investors, flushed with soaring stock option riches, made with exchange funds. (Access to this archived article requires payment to KeepMedia.)
Kerry Dolan
Forbes, 9/1/03
During its bull run of the 1990s, Yahoo! acquired dozens of e-businesses and made hundreds of stock millionaires in the process. Where are they now?
Neil Weinberg
Forbes, 4/29/02
Be careful of exotic tax-saving strategies and using margin loans to fund option exercises. What may work in a bull market can be disastrous when stock prices drop. (Access to this archived article requires payment.)
Joan Oleck
BusinessWeek, 3/1/99
Act quickly to protect sudden wealth, such as gains from stock options and other types of equity compensation.
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FAQs (Jump to articles)
A number of tax law provisions and interpretations that may affect your stock grants occur in the wide-ranging American Jobs Creation Act of 2004 (AJCA); the final regulations on deferred compensation under Section 409A (issued on April 10, 2007), which adopt the proposed regulations (published on October 4, 2005), as amended; and a series of notices from the IRS, beginning with Notice 2005-1...
Restricted stock refers to outright grants of company stock to employees or other service providers...
A concentrated stock position occurs when a significant chunk of your net worth is tied up in a single stock. Strategies for hedging, diversification, and liquidity include...
SEC Rule 10b5-1 provides a defense against charges of insider trading if you later trade stock while you know confidential, important information about your company. A Rule 10b5-1 trading plan is a program for the preset purchase and/or sale of your stock that meets the requirements of this SEC rule, including the need to...
You are in luck. SEC Rule 10b5-1 now provides an affirmative defense...
Starting on January 26, 2003, during any 401(k) blackout period directors and executive officers...
Using a blind trust goes beyond the protections of Rule 10b5-1 plans, yet has more restrictions. These are irrevocable grantor trusts with...
As a general rule, the contribution of the stock options themselves to a CRT is rather...
If your plan permits this and these are nonqualified stock options (NQSOs) and not incentive stock options (ISOs), transferable options raise complex issues concerning the valuation of the gift for tax purposes...
Stock ownership guidelines specify how much company stock you must own in total or as a multiple of salary. Most companies count in the calculation the...
Yes. The SEC's Division of Enforcement has been investigating...
This is not likely. Under the 2003 tax cut, "qualified" dividends are taxed at a top rate of...
The put options you buy give you the right to sell the stock at a price you choose. With call options you are selling the right to someone else to "call away" the stock you own. The IRS ruled that the...
This is a special feature included in a stock option at the time of grant. It provides for...
A reload encourages you to exercise the original stock options earlier than you otherwise might have. This lets you...
Under a limited number of stock plans, it used to be possible to defer delivery of shares, and related taxes, to some time after exercise or vesting. However, under Section 409A of the American Jobs Creation Act of 2004 (AJCA), this type of deferred compensation is...
Yes, but the arrangement must be carefully structured not to be considered a stock option or nonrecourse loan...
Yes. Section 16(a) of the Securities Exchange Act of 1934 provides that every person who is a director or executive officer (or a 10% beneficial owner) of a public company must file periodic reports of stock ownership with the SEC...
Having recoverable profits under Section 16(b) for a matching purchase or sale within six months does not mean that you received the amount of income which you reported for taxes. You calculate the profits under Section 16(b)...
To satisfy Rule 144, you must follow the resale rules for...
Yes. Your intentions do not matter...
Be very careful, as IRS actions and new rules have essentially shut down the use of these techniques. Before recent developments, some tax planners advised...
Receiving deferred stock units, or RSUs that let you delay the delivery of shares (and thus taxes) at vesting, depends on...
This depends on what triggers vesting. Section 162(m) of the tax code limits your company's deduction to $1 million unless a senior officer's compensation over this amount meets the performance-based exception. Stock grants are structured to meet this by...
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