CHART A COMPARISON OF COST--YEAR 15 Uninsured Insured Additional Cost Option Option w/ No Insurance Total Cost @ Year 15, $2,122,500 $457,275 $742,725 Life Expectancy Net Present Value $1,020,959 $346,909 $230,312 @ 5% Total cost includes the amount needed to exercise the options
($1,200,000) plus the projected amount needed to pay the estate taxes on the value of the stock once exercised ($922,500).
Proactive planning can enable executives holding stock options to develop sound strategies for when and how to exercise the options
. Here is a simple three-step optimization process:
When the ex-wife later exercised the options, the employer issued a Form 1099 to the husband for the difference between the stock's FMV at the time of the ex-wife's exercise and the amount paid to exercise the options
. The husband included this amount in income on his tax return for the year in which the ex-wife exercised the options; however, he later filed a refund claim.
To exercise the option
, A transferred to X 40 shares of X common stock that he had purchased on the open market on June 1, 1999 for $5 per share.
However, A could exercise the options
only after he performs additional services.
It would also require corporations that provide ISOs as compensation to furnish workers who exercise the options
with a Form 1099-like declaration of their expected tax liability by January 31 of the following year.
Jones must remain an employee of Entity X for three years to exercise the options
. Under FAS 123(R), Entity X recognizes $10,000 of compensation cost ratably over the three-year service period--if Jones remains with the company.
But, instead of rising in price, the stock drops substantially and is now worth less than what you paid to exercise the options
. You sell the stock for less than the exercise price, realizing a loss.
Another means of facilitating the exercise of options is to offer loans to employees of all or a portion of the funds needed to exercise the options
. Such loans should, however, be approached with caution.
The options vest two years later when the stock price is $25 per share, and executives exercise the options
four years after the grant, when the stock price is $40 per share.