Introduction
We have developed a technique called
the Family Stock Option Plan (FSOP) that can significantly improve the net
amount that will pass to your heirs. The
United States Patent and Trademark Office issued Patent
#6,567,790 on
A
Highlights and Benefits of this Technique
·
Shift
future appreciation of your options outside of your
taxable estate.
·
Remain
in total control of your options.
·
No
transfer tax cost.
·
Reduced estate tax.
·
Creditor
protection for your family.
·
Guarantees
that your options receive full value, including time value, if you die and your
employer accelerates the option exercise date.
·
Allows
you to share the wealth with your heirs during your lifetime without gift
taxes.
Non-Qualified Stock Options & What You Should Know
An option is the right to purchase stock at a fixed
price. A non-qualified stock option is
an option that does not receive preferential tax treatment and is considered
the equivalent of cash compensation.
Non-qualified stock options are subject to ordinary income taxes and
employment taxes when the options are exercised. This results in the option holder paying 40%
or more in taxes. The company takes a
tax deduction on the spread (difference) between the grant price and the market
price upon exercise.
The after tax proceeds from the option exercise will be
included in the taxable estate at death and is likely to be subject to a 50%
estate tax. Through death, the option holder
will pay 70% or more in taxes leaving only 30% or less of the option value to
heirs.
Most option plans require exercise of the options within 6
months of the date of death of an option holder. If the option holder dies, the 40% income tax
and the 50% estate tax will be due immediately, and the executive’s family will
not be allowed to hold the options to their natural maturity. In some circumstances, 7, 8 or even 9 years
of future option growth will disappear because the options must be exercised
within 6 months of death. Not only has
the family lost 70% of the options’ current value in the form of taxes, but
they have lost out on any appreciation of the option that occurs after the 6
month mandatory exercise.
For more information, please call us at 407-339-5787.
Option Terminology
Stock
Option – the right,
but not the obligation, to purchase a specific number of shares at a fixed
price for a predetermined period of time regardless of how much the stock price
fluctuates.
Incentive
Stock Option
(ISO) – a type of
stock that qualifies for preferential tax treatment provided that the option
holder holds the stock one (1) year and one (1) day after exercise and two (2)
years after the date of rant, whichever is later. Under current tax, the employee pays no taxes
at exercise and will be subject to capital gains tax if the holding
requirements are met. Exercise of ISOs
may subject the employee to AMT (Alternative Minimum Tax). The company does not receive a tax deduction
for this form of compensation. Incentive
stock options are for the optionee only and cannot be transferred.
Non-qualified Stock Option (NQSO) – an option that does not receive
preferential tax treatment and is considered the equivalent of cash
compensation. Option holder pays payroll
and income taxes at the time of exercise and, if they hold on to the stock, are
subject to capital gains treatment when the stock is sold. The company takes a tax deduction on the
spread between the grant price and the fair market value upon exercise.
Alternative Minimum Tax (AMT) – a tax calculation that may
subject an employee exercising incentive stock options to taxes that otherwise
would not be due.
Exercise Date – the date you take stock ownership of your shares by
converting an option to a share of company stock.
Exercise Price – the price you pay when you exercise the option (also
referred to as the grant price or strike price).
Expiration Date – the last date you are able to exercise your stock option;
the option will have no value after this date.
Fair Market Price – the amount a company’s stock is worth on a given day and
time; in terms of shares purchased through the exercise of a stock option,
refers to the trading price on the appropriate exchange at the time of
exercise.
Exercise
– to take ownership of shares granted through an option. For incentive, non-qualified, and ESPP plans,
this requires a purchase. In the case of
restricted stock, it requires meeting the terms of the vesting schedule.
Strike Price – the stated price per share for which underlying stock may
be purchased by the option holder upon exercise of the option contract.
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