How are death taxes calculated on unexercised non-qualified stock options?

July 23, 2001

Subject:   Estate Tax Question
Date:   Sun, 5 Nov 2000
From:   C.

Michael —

Super site. I just found it. Here’s my question —

How are death taxes calculated on unexercised nonqualified stock options that are in the money. Seems like the tax would mirror an IRA, i.e., a combination of estate tax on the gain and income tax from the heirs. Any info for me?



Date:   4 Dec 2000

Hello C.,

Your basic idea is right. The “value” of the stock options is taxed as part of the taxable estate on the estate tax return. Income from exercising the option will be taxable to the recipient, with a tax deduction available for estate tax paid for income with respect of a decedent.

The IRS has issued some guidelines for valuing non-qualified options. If the value of the options isn’t great, you can probably use the excess of the fair market value of the shares over the option price on the date of death. Otherwise, pay a tax return preparer to value the options.

Good luck!

Mike Gray

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

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