Planning for Executives Flashcards
What does executive compensation planning focus on?
Stock options, deferred compensation plans, and concentrated stock situations.
Name three key challenges in executive compensation planning.
Tax implications, regulatory restrictions, and diversification strategies.
What are the primary objectives in stock option strategies?
Diversification, tax minimization, and wealth accumulation.
What are Incentive Stock Options (ISOs)?
Stock options with tax benefits if specific holding periods are met.
What is the AMT preference item related to ISOs?
The spread between fair market value (FMV) and the exercise price.
What is a disqualifying disposition of ISOs?
Selling the stock before meeting the ‘2-year from grant’ and ‘1-year from exercise’ requirements.
How are Non-Qualified Stock Options (NSOs) taxed?
Ordinary income tax is due on the spread at the time of exercise.
What are the advantages of NSOs?
Few restrictions, transferable, and can be granted to non-employees.
What is a ‘cashless exercise’?
Simultaneous option exercise and stock sale to cover costs.
What is the ‘exercise and hold’ strategy?
Buying shares and holding them to qualify for long-term capital gains.
What is a stock swap?
Using existing shares to pay for the exercise cost of options.
What are the benefits of option gifting to family members?
Estate tax benefits and shifting future appreciation out of the taxable estate.
What is tandem exercise?
Combining ISO and NSO exercises to manage AMT exposure.
What is Section 83(b)?
An election to recognize income at grant to reduce future taxes on appreciation.
What is the main risk of a Section 83(b) election?
Potential loss if the stock value declines after the election.
What are the tax ramifications of NQSOs?
Ordinary income at exercise and long-term capital gains on future appreciation.
What does AMT planning for ISOs involve?
Calculating regular tax and AMT to avoid triggering excess tax liability.
What is a Section 457 Deferred Compensation Plan?
A tax-deferred plan for government or tax-exempt organizations.
What is the contribution limit for Section 457 plans in 2024?
$23,000.
Can Section 457 plans allow Roth contributions?
Yes, Roth contributions and in-plan rollovers are allowed.
What are restricted stock units (RSUs)?
Shares granted to employees with vesting conditions.
How are RSUs taxed?
Taxed as ordinary income when vested.
What is phantom stock?
A cash bonus tied to the value of the company’s stock.
What are performance share plans?
Stock awards granted based on achieving performance goals.
What is a zero-premium collar?
A strategy combining a purchased put and sold call to hedge price risk.
What are the benefits of a zero-premium collar?
Downside protection and retention of dividends and voting rights.
What is a prepaid variable forward?
An agreement to sell shares in the future for upfront liquidity and tax deferral.
What are the risks of a prepaid variable forward?
Ceiling on upside appreciation and potential tax complexity.
What is NUA?
A strategy to convert ordinary income taxation on retirement assets to long-term capital gains.
How does NUA work?
Elect a lump-sum in-kind distribution; the original basis is taxed as ordinary income.
What are the benefits of NUA?
Favorable capital gains treatment and diversification.
What is an exchange fund?
A private placement that diversifies concentrated positions through asset pooling.
What are the drawbacks of exchange funds?
Illiquidity and limited diversification benefits for certain contributions.
What is a charitable remainder trust (CRT)?
A trust providing income to the donor with the remainder going to charity.
How does a CRT benefit donors?
Tax deductions, estate reduction, and portfolio diversification.
What does Rule 144 govern?
The sale of restricted and control securities.
What is a Section 10b-5(1) plan?
A pre-arranged trading plan for corporate insiders to comply with SEC rules.
What is the short-swing profit rule?
Prohibits insiders from profiting on stock trades within six months.
What should clients consider regarding company stock?
Its role in their portfolio, risk tolerance, and diversification needs.
Why is an exit strategy for concentrated positions important?
To manage tax implications, liquidity, and portfolio risk.
