Your clients rely on you to guide them through their big financial planning decisions. But when it comes to their equity compensation, they often aren’t asking the right questions. Instead of actively incorporating equity compensation into their planning, many clients view it simply as the icing on the cake.
Most types of awards vest in the early months of the year, leaving your clients with potentially new wealth and new tax liabilities—and a need for trusted planning and advice.
Charitable planning can be a powerful tax-efficient move and opportunity to offset a potentially high-income year. While clients with equity compensation might be among the 90% of high-net-worth families who are already giving to charity, they may not have considered using these awards or other appreciated assets to fund their philanthropy. Providing guidance tied to tax-smart charitable giving can differentiate your business, deepen your client relationships and, best of all, help them maximize their impact.
What Are The Impacts Of Different Equity Awards?
Some of the most common types of awards are restricted stock units (RSUs), restricted stock awards (RSAs) and nonqualified stock options (NSOs)—each of which may result in different impacts on your clients’ income taxes. When RSUs or RSAs vest and are delivered, your client will most likely recognize ordinary income for the fair market value of the stock at that time and be taxed accordingly. Alternatively, upon the exercise of an NSO, ordinary income is recognized on the difference between the exercise price and the fair market value at exercise.
Any of these awards can result in a high-income year for your client, and thus a larger tax burden. On top of that, clients may be concerned about the concentration of one company’s shares in their portfolio, especially as more shares vest, and want to protect against tax exposure. In my work supporting donors and advisors, I’ve seen firsthand how charitable giving can be a creative solution to both concerns.
When Is The Best Time To Give?
To master this tax-smart strategy and showcase your unique value for your client, help them identify the best asset to give at the right time. Perhaps your client is newly eligible for equity awards and wants to donate them today. While simply donating options, RSAs or RSUs directly may seem like the right idea, most company plans restrict donations of these awards because of their inherently disadvantaged tax treatment. In addition, many professionals take the position that unvested RSUs and RSAs are not completed gifts for tax purposes and advise that the underlying unvested shares likewise cannot be gifted.
What about clients experiencing a vesting event? Can they donate the stock immediately upon vesting or exercise? Since the underlying stock will not have met the one-year holding period requirement to qualify for long-term capital gains treatment, it would not carry the same tax advantages.
Which Asset Is Best For Tax-Smart Giving?
Given these considerations, which is the right asset to give to help offset the tax burden? Examine your client’s portfolio: They might have additional shares of company stock or other appreciated assets that they have held for greater than one year. Industry data shows that more than 58% of employees hold shares long term from prior vesting or early exercise events tied to equity compensation, and that number increases to more than 70% for executives.
It’s these shares—previously acquired company stock or other appreciated assets—that may very well be the prime assets for high-impact charitable giving.
Compared with donating cash, or selling the securities and contributing the after-tax proceeds, donors who give long-term, appreciated assets like these can take advantage of three main benefits. Their gift qualifies them to take a tax deduction for the full fair market value of the stock, potentially eliminates capital gains taxes assessed on any appreciation and enables donors to give more to the charities they care about.