The question of whether a bypass trust can be funded with employee stock options is complex, requiring careful consideration of tax implications and the specific terms of both the trust and the stock option plan. Generally, it *is* possible, but not straightforward, and requires expert legal and tax advice to ensure it’s done correctly, avoiding unintended consequences. A bypass trust, also known as a marital trust, is designed to allow assets to pass to a surviving spouse without incurring estate taxes, and then to subsequent beneficiaries. Funding it with illiquid assets like employee stock options adds layers of complexity, as these options have vesting schedules, expiration dates, and specific rules around exercise and sale.
What are the tax implications of including stock options in my estate plan?
The tax implications are significant. Employee stock options are not valued at zero for estate tax purposes; they have a value equal to the difference between the fair market value of the stock and the exercise price. This value is included in the estate and potentially subject to estate taxes, which, in 2024, could be as high as 40% for estates exceeding $13.61 million. Moreover, when the options are exercised by the estate or the surviving spouse, the difference between the market value at exercise and the exercise price is considered ordinary income, not capital gains. It’s critical to consider these taxes when determining if and how to fund a bypass trust with stock options. According to a recent study by Cerulli Associates, approximately 5% of high-net-worth individuals have a significant portion of their wealth tied up in company stock, making this a common estate planning challenge.
How do vesting schedules affect bypass trust funding?
Vesting schedules are a primary concern. A bypass trust can only hold assets the grantor actually owns. If stock options are not yet vested at the time of the grantor’s death, the trust cannot directly receive them. The options remain an asset of the estate and are subject to estate taxes. However, the trust document can be drafted to allow the trustee to purchase the stock when the options vest, using estate funds. This requires careful planning to ensure sufficient liquidity is available and that the purchase aligns with the trust’s investment strategy. I once worked with a client, a tech executive named David, who held millions of dollars in unvested stock options. He believed he could simply transfer these options into his bypass trust. We had to explain that only vested options could be transferred, and we structured his plan to include a life insurance policy to provide liquidity for exercising and purchasing the stock as it vested.
What happens if I don’t plan for stock options in my trust?
A lack of planning can lead to significant problems. I recall another client, Sarah, a successful entrepreneur, who unfortunately passed away without addressing her stock options in her estate plan. Her options expired before her estate could exercise them, resulting in a loss of millions of dollars for her family. The estate was also forced into a lengthy and expensive probate process to determine how to handle the remaining options and the associated tax implications. This situation highlighted the importance of proactive estate planning, particularly for individuals with concentrated stock holdings. The American Taxpayer Relief Act of 2012 made some improvements to estate tax laws, but it’s still crucial to stay informed and adapt your plan accordingly. Currently, approximately 20% of estates are subject to federal estate taxes.
Can a properly structured trust actually save my family money and stress?
Absolutely. Fortunately, there are ways to mitigate these risks. One client, Michael, a CFO, came to us with a substantial amount of stock options. We structured his bypass trust to include provisions allowing the trustee to exercise the options and sell the stock over time, using the proceeds to fund the trust and provide for his family. We also incorporated a disclaimer trust, allowing his surviving spouse to disclaim a portion of the trust assets if it was more tax advantageous to do so. By proactively addressing these issues, we were able to minimize estate taxes, provide liquidity for his family, and ensure his wishes were carried out efficiently. Michael’s family was spared the financial and emotional burden that Sarah’s family had faced. A well-crafted trust, combined with expert legal and tax advice, can provide peace of mind and protect your legacy for generations to come.
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About Steve Bliss at Wildomar Probate Law:
“Wildomar Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Wildomar Probate Law. Our probate attorney will probate the estate. Attorney probate at Wildomar Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Wildomar Probate law will petition to open probate for you. Don’t go through a costly probate call Wildomar Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Wildomar Probate Law is a great estate lawyer. Probate Attorney to probate an estate. Wildomar Probate law probate lawyer
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
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Map To Steve Bliss Law in Temecula:
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Address:
Wildomar Probate Law36330 Hidden Springs Rd Suite E, Wildomar, CA 92595
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Feel free to ask Attorney Steve Bliss about: “How can I leave charitable gifts in my estate plan?” Or “What assets go through probate when someone dies?” or “Will my bank accounts still work the same after putting them in a trust? and even: “What property is considered exempt in bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.