Employee Stock Options - Transferability of NQSOs

NQSOs are transferable during life as well as in death. They may also be gifted. Below is a summary of the rules.

Transfer to natural persons

  • Income tax implications - the employee recognizes no gain on the date of transfer. The employee or his estate will recognize compensation income when the individual to whom the options are transferred (the transferee) exercises the option. That person's basis will equal the stock's fair market value when the option is exercised.
  • Gift tax implications - the date of transfer is when the transfer of the option is a completed gift. On this date, the option needs to be valued (e.g. Black-Scholes method).
  • Estate tax implications - The gift effectively removes the options along with any shares acquired upon exercise from the decedent's gross estate.

Transfer to a charity

  • Income tax implications - the employee recognizes no gain on the date of transfer. The employee will recognize compensation income when the charity exercises the option if the employee is alive. After his or her death, no compensation income would be recognized upon the charity's exercise of the option. The employee is entitled to a charitable income tax deduction on the transfer date or vesting date, if later.
  • Gift tax implications - the NQSO transfer is a completed gift on the transfer or vesting date, if later.
  • Estate tax implications - the employee's gross estate would include the value of any options unexercised upon his or her death. If the charity exercises the option and the employee dies within three years of the exercise date, his or her gross estate must include the value of the options at the date of death. The employee's estate would be eligible for an estate tax charitable deduction for the transfer of the option to charity.

Please refer to the estate planning section of the CFP® study guide for further clarification on rules for gifting and an items inclusion in or exclusion from one's estate.


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