Top
Equity awards offer an ideal avenue for client conversations early in the calendar year when many employers grant new awards or ones from prior years vest. While prospective clients should consult a CPA or attorney for tax advice, you can point out how the tax code can serve as a guide for identifying which shares should be disposed of first.
For example, restricted stock units (RSUs) are generally taxed as ordinary income on the day they vest. There's no tax benefit to holding them beyond vesting when that's the case. These shares can be thought of as salary in the form of stock. The same is true for non-qualified stock options (NQSOs). The difference between the strike price and the fair-market value is taxed as ordinary income at the time of exercise. While the timing of exercise will impact the timing of ordinary income, there's no tax benefit to continuing to hold RSUs or NQSOs once exercised.
On the other hand, incentive stock options (ISOs) and shares acquired through an employee stock purchase plan (ESPPs) often have potential tax benefits to holding or deferring disposition. Shares held inside a qualified retirement plan might be a candidate to reduce exposure without capital gains implications. In some cases, there may be an avenue to convert these shares to a taxable account in the future using net unrealized appreciation (NUA), which could also have potential tax advantages.
Suppose a prospective client receives RSUs from their employer, participates in an ESPP, and has company stock in their 401(k). Demonstrate the value you provide as an after-tax advisor by saying:
"Let's explore how the tax code might make it more attractive to keep some shares and sell others. After all, uncle Sam can be a coach not simply a referee."
Ask follow-up questions to help improve your understanding of how their overall compensation fits in with their financial goals:
- "To what degree have you considered letting the tax code guide your exposure to employer stock?"
- "When your RSUs vest, what do you usually do with the shares you receive?"
- "What do you do with the shares you purchase through your ESPP?"
- "Have you considered what you'll do with your employer stock in your 401(k) if it's eligible for NUA?"
Bottom line: Show prospective clients how and why the tax code makes some shares of employer stock worth keeping for the long term and others worth selling upon vesting.
While prospective clients should consult a CPA or attorney for tax advice, you can point out how the tax code can serve as a guide for identifying which shares should be disposed of first
Featured Insights
Risk considerations: At the Advisor Institute, our goal is not to shape your opinion or provide investment advice, rather to share this viewpoint as an example of what we believe to be a superb display of thesis articulation.
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.
Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.
This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.
This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.
Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results. The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.
This image indicates content designed specifically for Financial Advisors / Investment Professionals. This material is not to be used with the public.