Receiving stock or options from your employer can be a tremendous opportunity, but one that should be handled with care. The complexity of our nation’s tax code means that employee stock options come with a minefield of tax issues that can lead to a range of unintended tax consequences. The team at Keatley Wealth Management are experienced in valuing stock options and evaluating a variety of incentive compensation programs. We help our clients develop strategies for maximizing the value of their equity compensation. We also help manage the risk that can come from holding a concentrated position, while being mindful of potential tax pitfalls along the way.
When we first met with Jim and Catherine, it was evident that they were under a great deal of stress. With demanding careers at technology companies and four children, they were spread rather thin. When we sat down with them, more than 75% of Jim and Catherine’s net worth was invested in the stock of Catherine’s employer, a technology startup that was not yet profitable. Her employer had gone public a few years earlier, and the value of her stock and options had skyrocketed. Catherine was genuinely excited about the company’s future prospects and felt that her investment was possibly a once-in-a-lifetime opportunity. But on the other hand, she understood that success was not guaranteed. The possibility of the stock value declining was actually causing her and Jim to lose sleep.
Catherine wanted the ability to take some time away from her career to spend with her children, and knew that the investment in her company stock would allow her to do that – unless, of course, the stock value went down. Jim and Catherine’s advisor at a nationally-recognized brokerage firm wasn’t providing the kind of guidance they needed. The investment account managed by this broker contained additional volatile technology stocks which added to Jim and Catherine’s overall investment risk. Worse yet, high turnover in the account had generated significant taxable capital gains while leaving even larger capital losses unrealized. Jim and Catherine were going to pay substantial and unnecessary capital gains taxes while in the highest possible tax bracket.
“With demanding careers at technology companies and four children, they were spread rather thin.”
By the time Jim and Catherine came to us, it was close to the end of the year. Our first priority was to deal with the tax issue. As soon as the investment account was transferred to Keatley Wealth Management, we were able to move them out of their existing portfolio and realize capital losses to offset taxable gains. Because they were in the highest tax bracket, this move effectively reduced their taxes for the year by more than $40,000. In addition, we lowered the risk profile of this account by diversifying out of the volatile technology stocks which gave Jim and Catherine greater stability.
Our next move was to strategize with Jim and Catherine around the large holding in Catherine’s employer and develop a multi-year plan to gradually diversify a portion of the investment. This plan would allow Jim and Catherine to preserve substantial upside in the event that the company continued to excel, yet relieve a great deal of worry if the company faltered. We accompanied them to a meeting with their CPA to ensure that we were being tax aware every step of the way.
Looking ahead, we will continue to work with Jim and Catherine by evaluating their life and disability insurance as well as their estate documents. Our goal is to develop a plan that will provide the resources necessary to enable them to live the lifestyle they are accustomed to while allowing Catherine to take a much-desired sabbatical from work.
Matt, a senior executive at a public company, and his wife Barb, who worked in healthcare, came to Keatley Wealth Management in 2008. Matt had incentive stock options, non-qualified stock options, and restricted shares of his employer’s stock and wanted to be sure he was managing the stock options with an eye toward maximizing their value and minimizing taxes. But what really weighed on both of Matt and Barb’s minds was that this employer stock represented a significant share of their wealth. They were worried that they had “too many eggs in one basket.” We shared their concern.
Keatley Wealth Management got to work immediately and calculated the exact value of each stock option grant and helped Matt devise a strategy for exercising options at various points in time. We also provided insight on how to time the liquidation of vested shares to minimize tax implications. While reviewing Matt and Barb’s tax return, we discovered an accounting error made by their now former CPA, which was related to a previous options transaction. Much to their relief and benefit, when the corrected and amended tax return was filed, Matt and Barb recovered about $75,000 of overpaid income taxes from the prior year.
Years later, when Matt wanted to retire, we ran the numbers to be sure he and Barb could live a comfortable and secure retirement. We advised on Matt’s pension elections and other retirement benefits with an eye on balancing short-term fun with long-term security. Today, Matt and Barb are both retired and reaping the benefits of their many years of hard work. They are content knowing that with the retirement plan developed by Keatley Wealth Management, they will have sufficient resources to enjoy themselves, as well as provide a legacy for their children and grandchildren.
The case studies presented are not a guarantee of future performance or success. Services for actual clients are customized to each unique situation; therefore, investment and financial planning outcomes will vary among clients and results may be better or worse than those scenarios depicted. Information provided is for illustrative purposes only and should not be considered specific investment or financial planning advice. Nothing herein is intended as an endorsement of Keatley Wealth Management by any person.