What is the death tax on unexercised stock options?
November 13, 2000
Subject: death taxes on stock options
Date: Fri, 3 Nov 2000
What is the death tax on unexercised NQ stock options? I assume it would be exactly like an IRA due to the presence of “income in respect to a decedent” — correct? How about ISOs? (I was surprised not to see either issue covered in your material.)
Date: Mon, 13 Nov 2000
My material is intentionally not comprehensive.
People make a living providing tax advice, including me. It doesn’t make sense to give it all away. We encourage our readers to consult with a qualified tax consultant to apply tax planning ideas to their individual situations.
You are correct that non-qualified stock options and incentive stock options must be valued and included in a decedent holder’s taxable estate. The part of the value of non-qualified stock options that represents ordinary income is an item of “income with respect of a decedent” which may entitle the beneficiary who receives the options to a tax deduction for estate taxes attributable to the NQO when it is exercised.
The holding period and employment requirements don’t apply to an ISO after the death of the employee holder. (IRC Section 421(c).) The stock received from the exercise of an ISO after death will have a tax basis equal to the 706 value of the option plus the option price. The gain from the sale of the stock will be a capital gain, but the regular holding period rules will apply. (In order to qualify as a long-term capital gain, the stock must be held more than one year after the date of exercise.)
I highly recommend that any person who is handling the affairs of a deceased person who owned employee stock options work with a tax professional to prepare necessary estate and inheritance tax returns and income tax returns.