When we met Dan Stevens*, a wealthy executive in his 50s, more than half of his net worth was invested in the restricted stock and non-qualified stock options of his employer. The mid-size tech company was an unprofitable start-up when they hired Dan; however, several years later, it went public and the value of his restricted stock and options skyrocketed.
Dan loved his company and was optimistic about its future; yet he was losing sleep worrying over the value of its stock, which at the time, was declining. Additionally, he was concerned what the tax implications would be if he exercised his options.
To compound matters, Dan’s current financial advisor wasn’t providing the advice he needed and even had him invested in other volatile stocks in the technology industry. His advice to Dan was, “Buy what you know.” Dan hated paying more taxes than necessary and, given that non-qualified stock options are taxed at ordinary income tax rates, that advice didn’t sit well with him.
How We Helped
We created a comprehensive plan that addressed all of Dan’s concerns:
- Maximize option/stock value – Our initial proposal included potentially using pre-paid forwards and option collars, which would allow Dan to limit their downside while participating in some upside if he didn’t want to sell all the stock at once. However, he wanted to keep things simple, so we devised a strategy for him to exercise the stock options and sell them over time.
- Minimize taxes – At the same time, we analyzed the tax implications of exercising the stock options and provided insight into how to time selling them. We also met with Dan’s CPA to ensure he agreed with our recommendations.
- Investment management – We developed a new portfolio strategy and transitioned his shares of technology stock into a globally diversified stock and bond mutual fund/ETF portfolio across 40 different countries, including large-, mid- and small-company stocks in every industry. The plan included tax-efficient investments and enabled Dan to participate in the upside of the company over the next several years while allowing him to sleep at night knowing he’d be fine if the company failed.
- Legacy and estate planning – We evaluated Dan’s estate plan and ensured that his family would be protected in the event of an untimely death, while also leaving a legacy for the children. We also developed a fully funded and achievable plan in line with his goals and recommended estate-planning vehicles that would reduce overall tax exposure.
- Retirement plan – We also developed a retirement plan that would enable Dan to continue living the same lifestyle once he retired. Additionally, we conducted a comprehensive insurance evaluation, including making recommendations on life, long-term disability and auto-home umbrella policies.
If you have stock options and aren’t sure what to do with them, we can help. Our advisors will explain your choices and work with you to determine the best course of action.
* fictional name, but actual client
