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Lesson 16. Frequently Asked Questions > Your Estate and Options - Pg. 82

Frequently Asked Questions 82 Your Estate and Options Estate planning is not a "do-it-yourself" activity if you have extensive assets, including vested op- tions. These questions and answers will point you in the right direction. Question: What happens to my vested options if I die? Answer: That depends on how your options grant. Most plans allow your estate or heirs to exercise vested options, although there is sometimes a time limit to do this. One year is common. It is important to understand what your grant allows and to share that information, in writing, with your family or the attorney who will handle your estate. A copy of the options grant should be with your will and other important papers. If you work for a private company, its options grant may call for an immediate buyback at some predetermined value. Check with your plan administrator and legal counsel about how to structure the settlement. Question: What about unvested options? Answer: Check your plan, but in almost all cases, you forfeit unvested options when your employ- ment ends, even by death. If a disability forces you out of your job, there may be special rules in the grant options to extend vesting. However each plan can be different. Question: Are vested options included in a person's estate at death? Answer: Yes. Question: How are options taxed in a person's estate? Answer: Vested but unexercised options are included in your estate along with all your other assets. If the sum of those assets exceeds $675,000, your estate will pay tax on that amount. Caution Estate planning is a complicated subject. Employ expert help to fashion your plan. The value of vested options is determined by using an option's pricing model such as the Black- Scholes calculator, used in the industry to consider all the factors of an option and arrive at a value. These models are more applicable to options traded on the stock exchanges, since there usually is no market of employee stock options. These options have no real value until they exercise unlike publicly traded options bought and sold on the open market. Question: Are nonqualified stock options and incentive stock options treated the same for estate and income tax purposes? Answer: No. The tax code treats them differently for income tax purposes. The explanation is too long to include here, but be sure the tax counsel you are using understands the difference. It is best to plan this beforehand, since there may be some timing strategies that will help reduce the estate tax, which is probably going to be the larger of the two taxes. Disability Many companies have special provisions in their option grants for what happens if an employee becomes disabled. Hopefully, you won't have to face this situation; however, you should know the provisions and make your family aware of them. Question: What happens to my options if I become disabled and am unable to continue working? Answer: That is up to your options plan. You usually have longer to exercise your vested options than if you were laid off or fired. Many plans give you up to a year from the date of your status changing.