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CPWA > Planning for Executives > Flashcards

Planning for Executives Flashcards

1
Q

What is the annual limit for ISOs?

A

Annual $100,000 limit

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2
Q

Who can receive ISOs?

A

Can only be given to employees

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3
Q

Which type of employee stock option is transferable at death?

A

NSOs

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4
Q

How do you get LTCG treatment on ISOs?

A

sold more than 1 year after exercise

And if sold more than 2 years after grant

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5
Q

Disqualifying Disposition

A

If you sell, transfer, gift, or short the stock too soon, you lose the tax benefits of ISOs that occur with a qualifying disposition.

Not adhering to the holding period requirement
Potential taxation includes ordinary income tax treatment a compensation and possible capital gains tax on the transaction. There are situations in which this may be a preferred strategy (e.g., based on expectation of stock price)

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6
Q

Who can receive NSO?

A

Employees,
Directors,
Consultants

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7
Q

What is the difference between the triggering event for an NSO vs ISO

A

Triggering Event for NSO: Exercise (Ordinary Income)

Triggering Event for ISO: Stock Sale ( LTCG potential)

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8
Q

What are 4 tax minimization strategies for options?

A
  • AMT Planning
  • Tandem Exercise
  • Option Gifting
  • Grantor CLT
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9
Q

What are 3 Wealth Accumulation Strategies for Employee Options?

A
  • Stock Swap
  • Early Exercise
  • Exercise Early / Exercise Late
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10
Q

What is a Diversification strategy ?

A

• Exercise and Sell

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11
Q

What is a cashless exercise?

A

– Simultaneous option exercise and stock sale

– Used anytime after vesting and before expiration

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12
Q

When is Exercise and Hold Applicable?

A 
– Prior to expiration
– To capture dividends
– Recognize income in a specific year
– To produce LTCG on future appreciation
– To meet company requirements
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13
Q

What is pyramiding?

A

Plan specific provision - must specifically allow
Pay cash to exercise the first option, and then a small number of previously owned shares is surrendered to the company to pay a portion of the exercise price, for which a slightly larger number of option shares may be purchased.

These are then immediately swapped back to the company to pay additional amounts of the exercise price, and so on until the remainder of the options have been exercised. In the end you have a number of shares equal in value to the option “spread”

With the advent of broker-assisted “cashless exercise/same-day sale” programs, pyramiding has fallen out of favor.

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14
Q

Who is responsible for income tax on spread at exercise of a gifted NSO?

A

Donor

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15
Q

What are AMT Planning strategies on ISO Exercise

A

Exercise ISOs in first quarter of Year 1
Triggers potential AMT due April 15 of Year 2
Hold stock 1 year to meet ISO requirements
Sell stock before April 15 to pay tax
Downside risk is stock price declines in year

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16
Q

Assuming all requirements are met, how is the gain on an ISO sale calculated?

A

Difference between the exercise price and FMV at exercise is the bargain element - No Tax due. AMT preference item.

Exercise price = basis.

Sale proceeds - Basis = LTCG

17
Q

is there a tax when an NSO is exercised?

A

Yes, ordinary income on the bargain element

18
Q

When an NSO is later sold, what is the tax

A

Proceeds from sale - Basis = gain

Basis = FMV at exercise
Holding period rules for capital gains treatment applies

19
Q

When must an Section 83(b) Election election be made?

A

Must be elected within 30 days of grant

20
Q

What is the 83(b) election?

A

IRS recognizes income and levy income taxes of shares when granted, rather than later upon vesting.

If you’re able to exercise your stock options early (prior to vesting), you could elect to do so and file an 83(b) election within 30 days of exercise. This way, you can potentially minimize your future tax liability if the share price of your company happens to take off.

21
Q

What is a Section 457 Deferred Compensation Plans

A

They are non-qualified, unfunded deferred compensation plans established by state and local government and tax-exempt employers

Taxpayer contribute pre-tax dollars and isn’t taxed until the money is withdrawn, usually for retirement.

22
Q

What is NUA?

A

A strategy for retirement asset distribution
Applies to employer securities held in a qualified retirement plan (ESOP, pension, 401K, etc.)
Means to trade ordinary income taxation on retirement assets for long-term capital gains treatment

23
Q

How does NUA work?

A

Must elect lump sum, in-kind distribution from plan (full distribution in 1 year)
Original basis (i.e., contributions to plan) immediately taxable as ordinary income
Remaining value (Net Unrealized Appreciation) taxed as LTCG
Subject to premature distribution penalty rules for qualified plans (applies only to original basis)
No step-up of basis at death on NUA portion.
Subject to Income in Respect of Decedent (IRD)

24
Q

Are there voting rights with restricted stock?

A

Yes

25
Q

Advantages of Restricted Stock?

A

▪ Good for high performers— employees meet targets before receiving shares
▪ Can carry dividend or voting rights
▪ Retains some value for employees even if price declines
▪ Capital gains treatment available on gain with 83(b) election
▪ Requires fewer shares to provide a similar level of benefit

26
Q

Disadvantages of restricted stock?

A

Restrictions may make ownership seem like an unlikely benefit
Company cannot take a tax deduction for the value of the gain employees realize with 83(b) election
Subject to variable accounting rules, requiring changes in value be charged as compensation expense
Can involve risks for employees if 83(b) election made

27
Q

What are the sells stock under provisions of Rule 144:

A

Holding Period: One year if non reporting company, 6 months if reporting

Trading Volume: Number of shares sold during a 3-month period can’t exceed:
The greater of 1% of outstanding shares of same class being sold or if class is listed on stock exchange or quoted on NASDAQ

The greater of 1% or the average reported weekly trading volume during the 4 weeks preceding the filing a notice of the sale on Form 144

Filing Notice with SEC: Must file notice with the SEC on Form 144 if sales involve
more than 5000 shares or the aggregate dollar amount is greater than $50,000 in any 3-month period.

28
Q

What are 5 strategies for diversification?

A 
Variable Prepaid Forward
Exchange Fund
Purpose Loan
Collar with Purpose Loan
Custom Diversification Collar
29
Q

What are 4 liquidity strategies?

A

Restricted Stock Sale
Writing OTC Covered Call
Variable Prepaid Forward
Loan

30
Q

What are 3 hedging strategies?

A

Purchase OTC Put Option
Zero Premium Collar
Participating Collar

31
Q

What is Zero Premium Collar

A

Investor wants to continue to own underlying equity but hedge price risk
Purchases put option and sells call option against holdings for net zero premium
Specifies option maturities and degree of downside protection and upside appreciation

32
Q

What occurs when an investor borrows shares of stock and sells them short, while at the same time owning shares in the same stock.

A

Short Against the Box

Rules have been established to make this strategy (within certain constraints) illegal, but new strategies have been developed to accomplish the same goals.

33
Q

What is a Prepaid Variable Forward

A

strategy used by stockholders to cash in some or all of their shares while deferring the taxes owed on the capital gains

This strategy is typically used by investors who own a large number of shares in a single company and want to raise cash while postponing taxes.

The sale is not finalized. That’s an advantage for holders of stock options with a later exercise date.

34
Q

What are the advantages for a prepaid forawd?

A

Substantial liquidity generated upfront
No tax event until maturity
Provides floor for stock price
Investor retains ownership, dividends and voting rights until maturity date

35
Q

What is a 10b5-1 Plan?

A

Pre-arranged trading plans for insiders and affiliates

Specifies amount, price and date at which securities should be traded
Allows trading during “blackout periods”

May provide public with greater disclosure

36
Q

Terms to know

A 
Incentive stock option (ISO)
▪ Non-qualified stock option (NSO)
▪ Disqualifying disposition
▪ Section 83(b)
▪ Restricted stock
▪ Rule 144
▪ Section 10B5-1 Plan
▪ Zero premium (cashless) collar
▪ Short against the box
▪ Exchange fund
▪ Prepaid variable forward
▪ Stock swap (pyramiding) strategy

CPWA (11 decks)

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