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Subject:   taxation NQSO
Date:   Mon, 26 Jan 2004
From:   EJB

I have been terminated. I have substantial vested options. The vested options will soon be exercised. If I transfer the vested options to a family member, what will the tax considerations be for the family member and what will the tax be to myself, if any?

Many thanks... EJB

Answer

Date:   Mon, 02 Feb 2004

Hello EJB,

If the options are non-qualified stock options, the ordinary income from the exercise of the options will still be taxable to you as additional wages. (You can't assign earned income to another taxpayer.) The transfer of options may also be subject to gift tax. There is an exclusion from federal gift tax of up to $11,000 of direct (present interest) gifts. The IRS has issued complex rules for valuing gifts of employee stock options.

If you are very wealthy, there are estate planning reasons for doing this, otherwise I don't recommend it.

Only employees are permitted to hold incentive stock options. If you are allowed to transfer ISOs to another family member, they will be converted to NQOs.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.