For those who are fortunate enough to accumulate wealth, passing it along to future generations and donating it to charitable causes are important and laudable financial goals. However, you face a unique set of planning considerations if a large portion of your wealth comes from stock compensation: stock options, restricted stock, restricted stock units (RSUs), ESPPs, other types of equity awards, and holdings of company shares.
A recent myStockOptions.com webinar that I moderated featured a trio of experts in this complex planning niche. In this article, I present some of the knowledge and insights they shared.
Tax-law changes may be coming soon, as the Tax Cuts & Jobs Act (TCJA) is set to expire at the end of 2025 and Congress is working on a tax plan. However, the TCJA’s provisions on the exemption amounts for estate tax and gift tax do not affect the core strategies in this type of planning. The strategies outlined below will persist whether the TCJA is extended or not.
Core Tools Of Estate And Charitable Planning
Webinar panelist David Haughton, Senior Corporate Counsel at Wealth.com, started the webinar by going over the core legal tools involved in estate and charitable planning. Beyond your will, these include trusts and beneficiary designations.
Trusts
A revocable trust, also known as a living trust, acts as a bucket that you fill with your assets. It can help you avoid probate, among many other benefits. As it is revocable, it can be freely amended during your lifetime.
By contrast, he went on, an irrevocable trust is a type of trust that can’t be modified, amended, or revoked by the grantor once it has been created and funded. An irrevocable trust provides potential tax advantages and asset protection—but you have to be very certain about your decisions.
Unlike a will, which does not take effect until you pass, a trust is active on the day of its creation. Assets that you can put into a trust include not only company stock but also equity grants, such as restricted stock units (RSUs) or nonqualified stock options (NQSOs), depending on the terms of your grant agreement and the company’s stock plan, which could restrict your ability to transfer equity grants.
Alert: Become familiar with limits specified in your stock grants on transferring stock options and unvested stock grants to trusts and for donations. Your company may generally allow transfers while you are living or only to certain types of family trusts. Any transfer does not change the timing of the tax treatment at exercise or vesting. The income will still be recognized by the executive or employee who received the grant.
Beneficiary Designations
Another estate-planning tool Haughton discussed is the beneficiary designation, in which you leave assets to a beneficiary at death outside the probate process. For stock “you set that up directly through a financial institution,” he explained. Often this is commonly done with 401(k) plans, IRAs, and brokerage accounts. Depending on the terms of your company’s stock plan and procedures, you may be able to designate a beneficiary for your equity awards, such as RSUs or NQSOs.
Alert: When you later receive the underlying shares from the RSU vesting, option exercise, or ESPP purchase, the account those shares go into at your brokerage firm will have its own separate forms for beneficiary designation. The beneficiary designations you may have designed for your stock grants do not then automatically apply to the actual shares you receive.
Company Rules At Death
The company’s stock plan will have provisions dictating what happens to your outstanding equity awards if you die. For example, unvested stock options and RSUs may be forfeited. However, it’s not uncommon for the grant agreement to instead allow vesting to continue or even to accelerate the vesting and, for options, extend the exercise period for vested options. Therefore, your heirs, executor, trustees, and beneficiaries need to be familiar with rules for each grant received.
Tax Planning For Gifting And Wealth Transfer
For gifting and wealth transfer during your lifetime, tax planning is a major issue, along with your personal cash needs. This was a topic discussed by webinar panelist Mani Mahadevan, the CEO of the firm Valur, a firm that offers resources and strategies on tax planning and estate planning.
You can gift a certain amount to other people annually while you are living or at death before triggering gift and estate taxes, Mahadevan explained. In 2025, you may make annual gifts of up to $19,000 ($38,000 if made with a spouse) to any individual without either affecting a portion of your lifetime exemption or paying gift tax. Once you go over that yearly amount, your exemption for gift and estate tax is reduced. When the excess goes over your lifetime gift-tax exemption, you have to pay gift tax. The yearly amounts are indexed for inflation, and amounts over the exemption threshold are taxed at 40%.
In 2018, the Tax Cuts & Jobs Act doubled the estate-tax exemption. In 2025, the exemption is $13.99 million for unmarried taxpayers and $27.98 million for married taxpayers. However, the TCJA is currently set to expire in after 2025. If Congress does not extend the tax law, the exemption could return in 2026 to the much lower levels that were in effect before the TCJA. Your state may also have rules on estate tax and inheritance tax to know.
Gift To Trusts Or To Individuals?
With gifts of assets, such as company stock, the tax basis and holding period carry forward. This lifetime gifting is a strategy for all income levels, including gifting shares to those that would have a lower tax rate than you do on capital gains when they sell the stock.
Alert: Be familiar with the kiddie-tax rules before gifting shares to your children to then sell.
Except for smaller gifts “you want to gift to trusts rather than individuals,” Mahadevan emphasized. The benefits of giving to an irrevocable trust include advantages in estate tax and even income tax, some ongoing control over how the assets are used, asset protection, and privacy.
Gift Assets You Expect Will Grow
“You really want to focus on gifting assets that you expect to appreciate significantly,” Mahadevan continued. This is because at their current value they will use up less of your estate-tax exemption than they will in the future. “If you gift them sooner, the appreciation happens outside of your estate.”
Gift High-Basis Stock Instead Of Low-Basis Stock
Gift high-tax-basis assets, Mahadevan recommended, and keep low-basis assets. “When you sell appreciated assets, how much are you going to owe in capital-gains taxes? That’s entirely tied to the basis. You typically gift high-basis assets to a trust for your kids.”
Why continue to hold the low-basis stock and not put it into an irrevocable trust? For the stock not in that type of trust, after you die your estate or beneficiaries receive a “step-up” in the tax basis of the shares to the market value of the stock at the time of your death. Therefore, when the company shares are sold, the appreciation in the shares that occurred between your acquisition of the stock and your death would not be taxed to the estate or beneficiary for income-tax purposes.
This results in less capital-gains tax for the company stock that appreciated before your death. On the other hand, if you gift those assets to your kids before you pass away, they won’t receive a step-up in basis and will owe capital-gains tax on all the appreciation.
“This is a really powerful way for your heirs to inherit and sell appreciated assets and avoid capital-gains tax when they sell the stock,” Mahadevan observed.
How To Give: Strategies For Donations Of Company Stock
Webinar panelist John Nersesian, Head of Advisor Education for US Global Wealth Management at PIMCO, went through the many strategies and vehicles for making charitable donations of company stock that you hold.
He emphasized first that donating stock held for at least one year is much more tax-efficient than selling the stock and then gifting the cash proceeds, as you get a tax deduction for the fair market value at the time of the stock donation. “Appreciated investments are a very tax-efficient way to give,” he noted. “You can avoid the capital gains that would otherwise be realized at the time of sale.”
Alert: Donating and gifting company shares are dispositions under special holding-period rules for ISO stock and tax-qualified ESPP stock. The holding period is two years from grant and one year from exercise/purchase. Selling or transferring the stock before the holding period is met triggers a disqualifying disposition.
Donation vehicles for company stock that Nersesian discussed include the following.
Donor-Advised Fund
A donor-advised fund (DAF), Nersesian explained, is a private account that you create to manage and distribute charitable donations. When you give to a DAF, such as donating company stock, that amount is eligible for the charitable deduction on your tax return without the need at that point (or perhaps ever) to pick the nonprofits receiving the funds. When you’re making a very large donation of appreciated stock to a DAF (or to any charity directly), the tax deduction is limited to 30% of your adjusted gross income (AGI) per year, and you can carry forward what’s not used on that year’s tax return for five years.
Appreciation within a DAF is not taxable. When you itemize deductions on Schedule A of your federal tax return, the DAF “facilitates the bunching of deductions for maximum tax benefit.” Lastly, there are “no wash-sale implications—the stock can be repurchased immediately to maintain exposure with higher cost basis.”
Charitable Remainder Trust (CRT)
A CRT is an irrevocable split-interest trust that provides an income stream to designated beneficiaries (donor, spouse, family member) for a defined period (maximum 20 years) or for life. The remaining assets are distributed to designated charities at the end of the term, including DAFs.
“CRTs are suitable for concentrated and highly appreciated assets, such as company stock,” asserted Nersesian. There are many tax benefits. You, the donor, receive a reduced income-tax deduction upon funding. You achieve diversification with deferral of capital-gain recognition and remove assets from your taxable estate.
Charitable Lead Trust (CLT)
“A CLT is an irrevocable trust funded with donor assets that provides an annual income stream to a charitable organization for a pre-determined term or life of donor,” Nersesian observed. There is no minimum or maximum. “The remainder is distributed to the donor’s family members or to other noncharitable designated beneficiaries at the end of the term.” Benefits include charitable cash flow and reduced inheritance taxes.
Strategies For Estate Planning And Wealth Transfer
Webinar panelist Mani Mahadevan of Valur continued with some strategies and vehicles for estate planning and wealth transfer. They included the following two specialized types of trusts for company stock, including ways in which founders of startups can use them for QSBS stock.
Grantor-Retained Annuity Trust (GRAT)
“Particularly if the company is publicly traded and therefore easy to value, consider gifting stock to a GRAT,” said Mahadevan. A GRAT freezes a portion of an estate’s value while shifting asset appreciation to beneficiaries. The grantor gives up control of the assets for the term of the trust while receiving a regular annuity payment. At the conclusion of the GRAT term, remaining assets in the trust pass to heirs free of gift tax and estate tax. The trust can be structured so that the grantor does not use any of their lifetime exclusion for gift tax and estate tax.
You can transfer any type of financial asset to a GRAT. “GRATs are one of the most powerful estate-tax strategies, and they’re very well suited for public stock positions and become more favorable as interest rates lower,” observed Mahadevan.
Intentionally Defective Grantor Trust (IDGT)
This is, according to Mahadevan, “the most common, complex, and potentially impactful estate-planning trust.” The IDGT is an irrevocable trust that removes assets from the grantor’s estate but keeps the grantor as the income-tax owner. Therefore, trust assets avoid estate taxes on appreciation.
The IDGT is popular, he continued, because of its overall estate-tax efficiency. It allows you to personally pay the trust’s income taxes without using up your gift-tax exemption and allows the trust assets to grow tax-free outside your estate. “If the stock is privately held, it should receive substantial valuation discounts relative to enterprise value.” Specifically, Mani continued, an IDGT is “for people who expect to be significantly over the estate-tax-exemption amount and want to pass on assets to future generations.”
Further Resources
The webinar in which these experts spoke is available on demand at the myStockOptions Webinar Channel. Other resources on gifts and donations, estate planning, and death taxes with equity awards and company stock are available at the website myStockOptions.com.
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