Death
Death will have a large impact on the deceased's stock-based compensation--and likely on the beneficiaries of the estate as well
How Death Impacts Stock-Based Compensation
The hard-earned equity awards a deceased individual who owned stock-based compensation can be a significant asset and source of wealth for the beneficiaries of the estate. But, conversely, missteps can lead to a loss of some (or even all) of the accrued value. The key stock compensation considerations of a deceased individual are (1) what to do with vested stock options, and (2) is the vesting schedule modified/accelerated?
What to Do With Vested Stock Options
The key focus for any/all stock options that were vested when the deceased individual passed will be (1) does death cause the vested options to lapse, or do the vested options retain their status (at least for a period of time) that transfers to the estate; and (2) if vested options did not lapse, how long does the deceased's estate have to exercise the vested options before they expire.
At most companies, vested options do not lapse upon death. Presuming that the options did not lapse, the corporate stock-comp policy and/or options grants should dictate how long the deceased's estate has to exercise the vested options before they expire. This time frame is typically 90 days, but an post termination exercise period (PTEP) policy upon the death of a recipient is also somewhat common -> so the estate may have a longer period of time to make this decision.
ISOs are likely to have unique treatment. First, the IRS specifies that ISOs only retain their tax beneficial status for 90 days after you cease employment, regardless of any company PTEP policy (i.e. if a PTEP exists, ISOs will become NSOs on the 91st day). Second, if the estate is able, and wishes to retain, the preferential tax treatment that ISOs provide, they may need to ensure they take appropriate steps so that they do not disqualify the ISO.
Vesting Will Most Likely Stop, But Could Possibly Be Accelerated
Upon the passing of an individual with stock-comp, in most cases vesting will cease (e.g. no more additional shares will vest over time). That said, death is one of the more common circumstances where corporate policies provide for partial or full acceleration of grants. Like other items, it's important to read the company stock-comp policy, and the individual grants, to ensure you know and understand how the stock-comp of the deceased will (or should be) be treated.
Other Ways Death May Impacts Stock-Based Compensation
Know the company policies. Company policies may dictate how stock-based comp should be treated in the event of disability, but due to accidents (e.g. human or system error)--or, less commonly, intentional bad faith dealing--it may not always occur. Knowing how things should work helps ensure they actually occur as expected.
Possible negotiation. Company policies dictate how stock-based comp should be treated in the event of death, but it doesn't mean things are set in stone. In certain circumstances, a conversation with the company--especially a smaller company--may yield incremental benefits (e.g. additional vesting; an extended PTEP period).
Tax planning considerations. Depending on how vested stock options (and possibly accelerated vesting) are treated by the company, the estate of the deceased may have a number of choices to make regarding tax planning for the stock-based comp holdings. The overlap of stock-comp tax planning and estate taxation rules can be complex, and we recommend consulting with a licensed professional. But some of the strategies detailed in 50+ Tax Strategies may still apply.
10b5-1 plans (if applicable) will likely expire. Pre-arranged 10b5-1 trading plans for selling company stock should terminate upon death.
Last updated