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Beyond Critical Capital™
You have more than enough and do not believe you will need or spend all
that you have in your lifetime. Your concern is using that “excess”
for others, your family and heirs, other organizations or causes you want
to support.
In this stage you have not only reached Critical Capital, you have protected
it. You have much more money than you can possibly use during your lifetime
and you have a desire to help others.
Key Issues & Actions
In this stage there are often two key planning areas:
Estate planning and charitable giving are complex planning areas. In
this section, we will only be giving you a very basic introduction to
these planning areas and letting you know what some of the special issues
are when options are involved.
Estate Planning in General
The most important objective of estate planning is to determine how
your assets are distributed when you die, i.e., to make sure that the
people you want your estate to benefit get what you want them to get.
Once that has been established, the next objective is to reduce or
minimize estate taxes. When you die, the value of your estate
(everything that you own) is subject to tax. (Our estate tax system is
another tax system, separate and distinct from our income tax system.)
The amount of that tax is determined by the value of your estate and
must be paid by the estate before those assets can pass to your heirs.
Every estate is entitled to a tax credit which reduces the tax owed and
effectively exempts smaller estates from tax.
Planning to reduce estate taxes generally focuses on finding ways to:
- Transfer assets to heirs without paying tax.
- Transfer assets to heirs at a reduced value (which will reduce the
amount of the tax).
- Pay the tax in the most cost effective manner.
Stock Options and Estate Planning
If you are interested in exploring ways to reduce the taxes your heirs
may have to pay on the value of your options, the first thing you need
to do is to engage the services of an attorney who specializes in estate
planning and is familiar with the issues surrounding employee stock options.
Some of the issues you want to be aware of include:
- You may not be able to transfer or gift your options at all.
Stock options generally cannot be transferred or given away. Some option
agreements do allow transfers for limited estate planning purposes.
Read your agreement carefully to determine whether or not your options
can be transferred and, if so, under what conditions.
- The annual gift tax exclusion allows you to make a gift of up to $12,000
(in cash or property) per person per year without incurring a gift or
"transfer" tax. However, such a gift must be of a "present
interest," meaning that the recipient must be able to use it now.
The conditions attached to options may result in disqualifying them
for the annual exclusion.
- It is very difficult (or impossible) to determine the value of options
until they are exercised. Particularly if you are attempting to transfer
unvested options, you may be making a gift of an unknown value, which
makes the tax consequences also unknown.
- By law, ISOs cannot be transferred. However, certain transfers of
stock acquired by exercising an ISO are permitted without the transfer
triggering adverse tax consequences (i.e., being a "disqualifying
disposition").
- If you are able to transfer or give your options to your children,
for example. When they exercise the options, you will have to pay
the income taxes and may need to pay your company, in cash, any
amounts they are required to withhold. This is not necessarily bad if
your objective is to reduce the size of your estate while at the same
time transferring appreciation of the underlying stock out of the estate.
Charitable Giving
In its simplest form, charitable giving is nothing more than making a
gift of cash or property to a charity. Some basics to keep in mind:
- You can receive a tax deduction for charitable gifts. A deduction
is an amount subtracted from your income before the amount of tax in
computed. The "cash" value of a deduction to you is determined
by your income tax bracket. If you are in a 40% bracket, a $1,000 gift
will reduce your taxes by $400.
- The amount of charitable contributions you can deduct in any one year
is limited by the amount of your income and may be further limited by
the kind of property that is given and/or the kind of charity it is
given to.
- Due to the phase out of itemized deductions at higher income levels
and the Alternative Minimum Tax, you may not receive the full benefit
of a charitable contribution.
- You can only receive a tax deduction for gifts made to qualified charities.
Especially before you make a major gift, make sure the charity has been
properly qualified.
As it becomes more complex and becomes intertwined with your estate planning,
charitable giving becomes what is referred to as "planned giving."
Planned giving generally involves things like:
- Making gifts to charities when you die, either by specifying
the gift in your will or in trust documents. In this case, your estate
receives a tax deduction for the amount of the gift and the charity
receives the specified property when you die. There is no income tax
benefit.
- Charitable Remainder Trusts - These trusts provide for the
income from the trust to be paid to you (or some other beneficiary)
for life or a specified number of years. At the end of that time period,
what's left, the "remainder," goes to the charity. Assets
contributed to such a trust are removed from your taxable estate and
you can receive a current income tax deduction for the present
(discounted) value of the "remainder" interest, what the tax
law says the current value of that future gift to the charity is worth.
Charitable Annuity Trusts or Gift Annuities function in a similar manner.
- Charitable Lead Trusts - These trusts are like a mirror image
of the Remainder Trusts: Income from the trust is paid to a charity
for a specified time period and the "remainder" comes back
to you or someone else you specify. If the remainder is going to someone
else, the value of these assets may also be excluded from your taxable
estate and you may receive a current income tax deduction for
the present value of the income stream you are giving to the charity.
Stock Options and Charitable Giving
After you have met the financial needs of you and your family, charitable
giving can be one of the most fulfilling financial activities you can
engage in. It can be exciting to see your stock option wealth used to
benefit people and causes you care about.
If you have reached a point where the wealth you own will not be consumed
by you or your family during your lifetimes, without doing some charitable
gift planning, the government will be one of, if not the major
beneficiary of your estate. If you would rather have other organizations
or causes benefit from your stock option wealth, we'd encourage you to
so some serious planning!
As a general rule, you will not be able to give your options to a
charity. Most option agreements prohibit such gifts. You will probably
need to exercise your options and then make a gift of the stock you receive
(or sell the stock and give the cash). An outright gift of the stock or
cash may create a tax deduction large enough to eliminate all taxes due
from the exercise.
What should you do?
Consult with your professional advisor(s). You may need a team of professionals
(attorney, accountant and financial planner) who are experts in estate
and/or charitable planning and are familiar with employee stock options.
Not only are the laws complex, they change on a regular basis.
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