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Lesson 15. More Strategies and Tips > Transfer Options - Pg. 70

More Strategies and Tips 70 If you or your soon-to-be ex have substantial unvested options, you should consult a tax expert with experience in dealing with these situations. However, the tax code is so murky in this area that tax counsel may be guessing like everyone else. Caution This is a new area for divorce law, and how the courts have ruled in the past is no guarantee of future decisions. This is not a subject for "do-it-yourself" tax planning. Missteps in how you approach your unvested options can be costly. Here are some tips to discuss with your legal and financial advisers: · If you have vested options, you may want to exercise and split the stock or sell the stock and split the cash. · You may want to consider setting aside disposition of unvested stock options until they vest with an agreement about how you will handle them. · Your spouse may agree to accept a tangible asset in exchange for the unknown future value of unvested stock options. In this case, you are bearing the risk that the options will be worth as much or more vested than the asset you traded. Your legal and financial counselors may find none of these work in your situation because they must weigh the options in the context of your complete financial picture. Many individuals who have unvested options going into a marriage elect to use a prenuptial agree- ment that spells out how the options fit into a divorce proceeding. This is not very romantic, but certainly not uncommon. If your unvested stock options happen to come from a private company, you really face a challenge in arriving at an equitable agreement. Privately held stock compounds all of the complications I mention above by the difficulty in arriving at a value on the underlying stock. Transfer Options If you are considering estate planning, you can use your options to reduce the size of your estate. You may ask why you would want to reduce the size of your estate. The answer is up to 55 percent taxes on your estate over a certain amount. Without some careful planning, you may hand over one- half of your estate beyond the exemption to the government. Tip The size of your estate over $675,000 may determine how much you pay in estate taxes. This exemption will increase to $1 million over the next couple of years, and there is talk about eliminating the "death" tax altogether. A strategy to reduce your estate will save your heirs a large tax bill upon your death. This is another area where expert advice about your particular situation is absolutely critical. Here are some major points you need to know about your estate. The current law allows you to exempt up to the first $675,000 (called the Unified Credit Amount) from estate taxes. For many people, this is enough to shelter most if not all of their estate. However, if you have substantial holdings in stock options and other assets you may want to protect them from the clutches of the IRS. One way to do this is to reduce the value of your estate through gifts to family members. The theory here is that they would get the asset eventually and it makes more sense to give them the full value now rather than letting the government take a big chunk in estate taxes. The tax code generally allows you to give up to $10,000 to a child, grandchild, or other heir ($20,000 for a couple) each year tax-free to them. If you give more than these limits, the excess reduces your $675,000 by that amount. You can also transfer the asset to a family trust.