stock options and the executive five strategies estate planners need to know

8/9/2019 Stock Options and the Executive Five Strategies Estate Planners Need to Know

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5 Strategies Estate Planners Need to Know

Securities offered through LPL Financial Member FINRA/SIPC

6/7/2010


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Dan Langworthy Principal & Founder

Executive Capital Team

Our Focus Turn equity awards into wealth for corporate executives

Equity Award Strategies & Wealth Management

Technology-Based Formulas

Advanced Estate Planning Strategies

Our Clients Corporate Executives in public companies


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Purpose of Equity Awards

The Corporate Executive Market

No Equity Award Strategies Painful Examples

5 Strategies for the Estate Planner Equity Award Strategy Success Story

Summary


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Retention Tool

Motivation and Incentive

Feeling a Sense of Ownership

Recruit Talent


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Stock Options- Nonqualified and Incentive

Restricted Stock- Grants and Units

Stock Appreciation Rights (SARS)

Employee Stock Purchase Plans (ESPP)


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Offered back in the 1920s Pfizer offered options in the 1950s 10.6 million employees own options

18% of the workforce1

Represents $100+billion1

77% of public companies grant options2

50% options vest 3 years, 40% vest in 4 years2

1 NCEO 2006 Survey2 Frederic W. Cook 2009 Top 250 Report


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Buck Consultants Survey- January 2009 31% companies expect to increase the number of options or

shares

16% increase in using options, less use of shares

(opportunity to deliver greater value upon stock recovery) 59% companies reported these changes were a result of

significant drop in share price

Charles Schwab/ Koski research

Stock Plans 9-15-09 Companies greatest challenge is educating employees

Companies received 38% more questions on what to do


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NASPP and Deloitte consulting- December 2007 428 companies in study

87% of Senior management receives NQ options

51% of Senior management receives ISOs

89% that issue ISOs, issue up to ISO limit before issuingNQ options

51% of participants exercise their options less than 2 yearsafter shares are vested


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Defined, profitable market niche

Grow & develop your opportunities Concentration builds wealth; Diversification protects it!

Differentiate yourself with specializedservice offering

Reduce your competition with other attorneys

Cost-effective lead generation: Referrals


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Market Risk& Time

Estate PlanningNeed

Executives receiving stock awardsClimbing corporate ladder

Enjoys affluent lifestyle

Market impacts value

Fewer have HNW

Fewer Need

Estate

Plans


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Executives receiving stock awards

Leverage Equity Award Strategies

And, can maintain desired lifestyle,Reduce market risk and volatility

Resulting in MORE corp. execs.Needing Advanced Estate Planning

EquityAward

StrategiesMinimizeMarket

Risk

Help toGrow

&Develop

YourClientsEstate


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Mid-level manager at McLeod USA earning $75,000 annually

In the beginning of 2000, exercised ISOs of McLeod, stock

at $104.56

Exercised $745,372 for $34,254

AMT reportable income for 2000 of $711,118 Assessed regular federal income tax of $18,678 and

$224,869 in AMT

Stock dropped from $104.56/share to $0.80/share by the end

of the year Submitted an Offer in Compromiseto settle remaining tax

liability

IRS rejected their offer


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46 year old (Founder)

Pemstar represented 90%+ of net worth($5,500,00)

Stock at $14.30/share

Recommended diversification strategy (hedgingtechniques)

2 years later stock less $1.00/share

Ultimately Pemstar bought out byBenchmark Electronic


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I. Understanding the Differences Between ISOsand NQ options

II. Determining when to exercise stock options

III. Minimizing the tax implications on ISOsIV. Gifting stock options to reduce the estate

V. Using existing shares to exercise options


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Nonqualified Options No tax when option is granted

Compensation Income when exercised

Subject to Withholding and Social Security

Future sale stock L-T/S-T Gain/Loss Incentive Stock Options

No tax when exercised

Qualifies for Special Tax Treatment

Subject to AMT in Year of Exercise L-T Capital Gains if held one year from exercise

$100,000 Limitation Rule


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Two values in options

Intrinsic value and Time value

Intrinsic value- Differences between the

current value of the stock and exercise priceof the option

Time value- The dollar value attached to thepotential profit from continuing to hold the

option


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Exercise Price and Stock Value Expiration Date

Interest Rates

Volatility Dividends


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Exercise Price Current Stock Price Profit Percentage16/share 50 68% (50-16)/50

22/share 50 56% (50-22)/50

30/share 50 40% (50-30)/50

44/share 50 12% (50-44)/50

The dollar amount of profit/share from exercising the

option divided by the value of the stock

*Does not reflect the time value


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Grant IDGrantType

ExpireDate

ExercisePrice

VestedITMV $

VestedTime

Value $

VestedTotal

Value $InsightRatio

ISO03 ISO 3/14/2013 $62.8000 74,295 35,326 109,621 32.23 %

ISO2004 ISO 3/31/2014 $81.8000 0 104,470 104,470 100.00 %

ISO2005 ISO 3/31/2015 $85.4000 0 111,267 111,267 100.00 %

NQ2006 NQSO 3/30/2016 $75.7000 23,465 136,651 160,116 85.35 %

NQ2007 NQSO 3/30/2017 $74.6000 30,615 145,517 176,132 82.62 %

NQ2008 NQSO 3/31/2018 $79.1000 1,155 148,375 149,530 99.23 %

NQ2009 NQSO 3/31/2019 $49.7000 192,465 83,616 276,081 30.29 %

NQ2010 NQSO 3/30/2020 $83.5000 0 131,021 131,021 100.00 %

Total 321,995 896,242 1,218,237

Determining When to Exercise Your Option Grants

Current Stock Price: $79.31 Volatility: 26.00 %Risk Free Rate: 2.00 % Date: 6/1/2010


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800 850 900 950 1,000 1,050 1,100 1,150

20% per year/AMT Limit

After-tax c/f $75,000

Exercise ALAP

Total Portfolio Value in 15 Years ($000) when holding remaining

options and shares

Total Portfolio Value at 15 Years


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AMT Buffer-The amount by which regular tax isprojected to exceed tentative minimum tax(TMT)

Know clients effective AMT rate Bargain element (gain) per share

Bargain Elements/Share

25 = 3077/shares

AMT Buffer $

Effective AMT Rate

20,000

0.26

Example:


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Bailing out of AMT Exercising early in the year

Evaluate tax benefit to holding ISOs for over

one year Using the AMT credit in future years


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Gifting is one strategy that can be leveraged togrow and protect the family nest egg during bear

markets.


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Nonqualified Options (NQ) Can be issued to non employees

Allowed for Gifting Purposes

Incentive Stock Options (ISOs)

Issued to employees only

Not allowed for Gifting Purposes


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Is it allowed under Options Agreement? NASPP Survey: 75% Prohibit Transfers

Administrative Challenges

Omnibus Plans: Covers many classes

Risk of potential reporting violations

Trend for Companies Amending Plans


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Black-Scholes Value Intrinsic Value + Time Value

Examples:

Sea Level Options

Underwater Options

Substantially in-the-money Options


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Stock Options (Interest Free Loan) Inherent Leverage

Potential Appreciation Outside Estate


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PotentialStock Price

IncrementalChange Option Value $

Option ValueChange

$32.49 -20.00 % 0 0.00 %

$40.61 -20.00 % 0 -100.00 %

$50.76 -20.00 % 11,482 -92.44 %$63.45 -20.00 % 151,865 -66.30 %

$79.31 0.00 % 450,650 0.00 %

$95.17 20.00 % 1,260,167 179.63 %

$114.21 20.00 % 2,339,069 85.62 %

$137.05 20.00 % 3,633,298 55.33 %

$164.46 20.00 % 5,186,485 42.75 %

$197.35 20.00 % 7,050,197 35.93 %

Equity Compensation Leverage (MMM)


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Donor Subject to Ordinary Income Rev Ruling 2004-64 (taxes paid, not gift)


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Donating Options to a Charity Transferring Options to a FLP

Sale of Options to a Related Party

Transferring Options to a GRAT


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Nonqualified Report compensation income on value of additional

shares with new basis

Example:

Option to buy 10,000 shares at $10/shareCurrent stock price- $40/share

Can pay $100,000 to exercise options, or

Can exchange 2,500 of existing shares (100,000/40=2500)

Exchange shares (2,500) and retain cost basis Remaining shares (7,500) compensation income of

$300,000 (7,500x$40) with new basis


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No need to come up with the cash Does not pay tax on the exchange shares

Frees up cash to diversity portfolio


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Tax Consequences Disqualifying dispositions are unclear and potentially

adverse

Generally avoid exchanging shares for ISOs


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OshKosh Truck Executive Completed option analysis

Options issued in 2003, Low Insight Ratio

Exercise options at $61.50 in May 2007 May 2008 = $39.50, May 2009 = $10.40

Executive paid off house

Recently completed estate plan


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Segment your existing client base Offer Equity Award Strategies to strengthen current

offering and grow client base

Partner to augment skills; provide necessary services

Equity Award Strategy AdvisorAccountants

Equity Compensation Professionals


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Build niche practice for Corporate Executives Equity Award Strategies offer competitive differentiator

Expand your practice: Local market

opportunity Minnesota Market

34 of Fortune 1000 public companies

56 of top 100 companies stashed away $42 billion in2009

Enjoy rewards of new market opportunity!


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www.fairmarkpress.com

www.nceo.org

Book: Consider Your Options, By: Kaye Thomas
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Website: www.executivecapitalmn.comE-mail: [email protected]

Blog: www.equity-compensation.com

Phone: 952-886-7233
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