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CPWA Test Prep > Planning for Executives > Flashcards

Planning for Executives Flashcards

1
Q

What does executive compensation planning focus on?

A

Stock options, deferred compensation plans, and concentrated stock situations.

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2
Q

Name three key challenges in executive compensation planning.

A

Tax implications, regulatory restrictions, and diversification strategies.

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3
Q

What are the primary objectives in stock option strategies?

A

Diversification, tax minimization, and wealth accumulation.

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4
Q

What are Incentive Stock Options (ISOs)?

A

Stock options with tax benefits if specific holding periods are met.

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5
Q

What is the AMT preference item related to ISOs?

A

The spread between fair market value (FMV) and the exercise price.

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6
Q

What is a disqualifying disposition of ISOs?

A

Selling the stock before meeting the ‘2-year from grant’ and ‘1-year from exercise’ requirements.

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7
Q

How are Non-Qualified Stock Options (NSOs) taxed?

A

Ordinary income tax is due on the spread at the time of exercise.

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8
Q

What are the advantages of NSOs?

A

Few restrictions, transferable, and can be granted to non-employees.

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9
Q

What is a ‘cashless exercise’?

A

Simultaneous option exercise and stock sale to cover costs.

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10
Q

What is the ‘exercise and hold’ strategy?

A

Buying shares and holding them to qualify for long-term capital gains.

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11
Q

What is a stock swap?

A

Using existing shares to pay for the exercise cost of options.

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12
Q

What are the benefits of option gifting to family members?

A

Estate tax benefits and shifting future appreciation out of the taxable estate.

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13
Q

What is tandem exercise?

A

Combining ISO and NSO exercises to manage AMT exposure.

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14
Q

What is Section 83(b)?

A

An election to recognize income at grant to reduce future taxes on appreciation.

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15
Q

What is the main risk of a Section 83(b) election?

A

Potential loss if the stock value declines after the election.

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16
Q

What are the tax ramifications of NQSOs?

A

Ordinary income at exercise and long-term capital gains on future appreciation.

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17
Q

What does AMT planning for ISOs involve?

A

Calculating regular tax and AMT to avoid triggering excess tax liability.

18
Q

What is a Section 457 Deferred Compensation Plan?

A

A tax-deferred plan for government or tax-exempt organizations.

19
Q

What is the contribution limit for Section 457 plans in 2024?

A

$23,000.

20
Q

Can Section 457 plans allow Roth contributions?

A

Yes, Roth contributions and in-plan rollovers are allowed.

21
Q

What are restricted stock units (RSUs)?

A

Shares granted to employees with vesting conditions.

22
Q

How are RSUs taxed?

A

Taxed as ordinary income when vested.

23
Q

What is phantom stock?

A

A cash bonus tied to the value of the company’s stock.

24
Q

What are performance share plans?

A

Stock awards granted based on achieving performance goals.

25
Q

What is a zero-premium collar?

A

A strategy combining a purchased put and sold call to hedge price risk.

26
Q

What are the benefits of a zero-premium collar?

A

Downside protection and retention of dividends and voting rights.

27
Q

What is a prepaid variable forward?

A

An agreement to sell shares in the future for upfront liquidity and tax deferral.

28
Q

What are the risks of a prepaid variable forward?

A

Ceiling on upside appreciation and potential tax complexity.

29
Q

What is NUA?

A

A strategy to convert ordinary income taxation on retirement assets to long-term capital gains.

30
Q

How does NUA work?

A

Elect a lump-sum in-kind distribution; the original basis is taxed as ordinary income.

31
Q

What are the benefits of NUA?

A

Favorable capital gains treatment and diversification.

32
Q

What is an exchange fund?

A

A private placement that diversifies concentrated positions through asset pooling.

33
Q

What are the drawbacks of exchange funds?

A

Illiquidity and limited diversification benefits for certain contributions.

34
Q

What is a charitable remainder trust (CRT)?

A

A trust providing income to the donor with the remainder going to charity.

35
Q

How does a CRT benefit donors?

A

Tax deductions, estate reduction, and portfolio diversification.

36
Q

What does Rule 144 govern?

A

The sale of restricted and control securities.

37
Q

What is a Section 10b-5(1) plan?

A

A pre-arranged trading plan for corporate insiders to comply with SEC rules.

38
Q

What is the short-swing profit rule?

A

Prohibits insiders from profiting on stock trades within six months.

39
Q

What should clients consider regarding company stock?

A

Its role in their portfolio, risk tolerance, and diversification needs.

40
Q

Why is an exit strategy for concentrated positions important?

A

To manage tax implications, liquidity, and portfolio risk.

CPWA Test Prep (12 decks)

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