Restricted Stock Units Issues

Restricted Stock Units Grant Issues

Client Centered

Do you need to review how RSUs work?

RSUs are a type of compensation granted by an employer to an employee in the form of company shares. However, the shares are “restricted” because they’re subject to a vesting schedule, which typically depends on meeting certain performance milestones or staying with the company for a certain period of time.

Do you need to confirm the conditions of vesting?

Vesting conditions for RSUs depend on the specific grant agreement. Generally, they vest over a period of time, often over 3-5 years. Some vest on a schedule (e.g., 20% each year for five years), and others cliff vest (e.g., 100% vesting after three years). Some plans may also have performance-based vesting conditions.

Does your plan allow you to defer the distribution of shares and continue to hold units until a later date, post-vesting (e.g., at retirement)?

This depends on the specific terms of your RSU grant and company policy. Some companies may allow you to defer distribution, while others will distribute shares as soon as they vest. It’s important to review your specific grant agreement or consult with your HR department for details

Client Centered

Do you need to review what you will receive when your RSUs vest?

When RSUs vest, they are converted into shares of the company’s stock. You then own these shares outright and can hold them, sell them, or otherwise manage them as you see fit. However, taxes are typically due at the time of vesting based on the fair market value of the shares.

Does your company accrue/pay dividend equivalents while you hold RSUs?

Some companies pay dividend equivalents on RSUs, which are payments equal to the dividends you would have received if you had already owned the shares. These can either be paid out immediately or accrue and be paid out when the RSUs vest. Not all companies do this, so you would need to check your specific RSU agreement.

Do you need to review how the termination of your employment (voluntary or involuntary), disability, or death might affect your interests under your plan?

The treatment of RSUs upon termination of employment, disability, or death can vary significantly by company. In many cases, if you leave the company before your RSUs vest, you forfeit them. However, some companies may have provisions that allow for accelerated vesting or continued vesting under certain circumstances, such as retirement, disability, or death. Again, check your specific RSU agreement or consult with your HR department for details.

Restricted Stock Units Investment Issues

Client Centered

Do shares of your company’s stock, along with any unvested RSUs, make up a significant percentage of your investment portfolio (e.g., more than 10%)?

It is generally recommended to maintain a diversified portfolio to reduce risk. If a significant portion of your portfolio is made up of your company’s stock or unvested RSUs, you may be overly exposed to the performance of your company. If your company experiences downturns, it could significantly impact your portfolio value.

Does your company have a blackout period or trading window, or are there other limitations on your ability to sell shares?

Some companies have blackout periods during which employees cannot trade company stock. There might also be a designated trading window when employees are allowed to trade. The aim of these policies is to prevent insider trading and the misuse of confidential information. Review your company’s policy or consult your HR department for this information.

Do you need downside protection while holding your company’s shares?

Depending on your financial situation and risk tolerance, you might want to consider downside protection strategies for your shares. These strategies can help you mitigate potential losses if the company’s stock price declines. This could involve financial instruments like options or insurance products, or a hedging strategy. Consult a financial advisor to help determine the best strategy for you.

Are you considering selling company shares at a loss?

Selling shares at a loss, or “tax loss harvesting,” can sometimes be a strategic move for tax purposes, as it can offset capital gains taxes from other investments. However, this decision should be made carefully and in the context of your overall financial and tax situation. It’s generally recommended to consult with a tax professional or financial advisor to understand the potential implications.

Restricted Stock Units Tax Issues

Client Centered

Do you need to understand the tax consequences of the grant of your RSUs?

Generally, there are no immediate tax implications at the time RSUs are granted. Taxes come into play when the RSUs vest, as this is when you technically receive income.

Do you need to understand the tax consequences of the vesting of your RSUs?

When RSUs vest, they are considered taxable income. The amount of income recognized is the fair market value of the shares at the time of vesting. This income is typically subject to ordinary income tax rates.

Do you want to reduce your income tax liability in the year that your RSUs vest?

The ability to reduce your income tax liability in the year your RSUs vest is somewhat limited, as vesting RSUs are treated as compensation and subject to ordinary income taxes. However, you may be able to strategically manage when your RSUs vest to spread out the tax impact over several years, if your plan allows.

Do you need to plan for tax withholdings in the year of vesting?

Yes, tax planning is important when RSUs vest. Employers often withhold taxes at the time of vesting, similar to paycheck withholdings. Depending on your overall tax situation, you may owe additional taxes or may get a refund when you file your tax return.

Client Centered

Does your company offer the IRC §83(i) election to defer the recognition of income for up to five years after your RSUs vest?

Some companies may allow you to defer the recognition of income under IRC §83(i). This allows eligible employees to defer income taxes on the vested RSUs for up to 5 years. However, not all companies offer this, and there are specific requirements to qualify for this deferral.

Do you need help determining your cost basis in any shares acquired at vesting?

Your cost basis in the shares acquired from vesting RSUs is typically the fair market value of the shares on the vesting date. This is also the amount that is reported as income and subject to income taxes.

Do you need help determining your holding period for shares acquired through your RSU plan?

Your holding period for the shares starts on the vesting date. This is important for determining whether any gains from selling the shares are treated as long-term or short-term for capital gains tax purposes.

Do you need help understanding the tax consequences of the sale of shares acquired through your RSU plan?

When you sell shares acquired from vested RSUs, any increase in value over your cost basis is subject to capital gains taxes. If you held the shares for over a year before selling, it’s typically a long-term capital gain. If you sold the shares less than a year after vesting, it’s a short-term capital gain.

Restricted Stock Units Planning Issues

Client Centered

Do you need to assess your employer’s future equity value and long-term viability?

This is an important consideration for RSU holders, as the value of your RSUs depends on the future performance of the company. You may need to consider factors such as the company’s financial health, industry outlook, competitive position, and management team.

Is there a risk that your company will be acquired in the near future?

An acquisition can have a significant impact on your RSUs, possibly leading to vesting acceleration, conversion into the acquiring company’s stock, or cash-out. It’s important to understand your company’s prospects and the terms of your RSU agreement to assess potential outcomes.

Do you have future financial goals that your RSUs/shares could help to achieve?

RSUs can be a significant component of your financial plan. Whether it’s funding retirement, buying a home, or paying for education, your RSUs can contribute toward these goals. A financial advisor can help align your financial plans with your RSU vesting schedule and potential value.

Do you need to address your RSUs in your estate plan or in a pending divorce?

RSUs should be addressed in your estate plan, as they can be a significant asset. Similarly, in a divorce, RSUs may be considered part of marital property, and their division can be complex. Both scenarios require expert legal advice.

Does your plan allow you to designate a beneficiary?

RSU plans often allow you to designate a beneficiary to receive your RSUs in the event of your death. Check the terms of your RSU agreement or consult with your HR department to confirm this.

Do you need to consider any state-specific issues?

Yes, the state you reside in can have implications on how your RSUs are taxed and how they may be treated in situations like divorce. Different states have different rules and regulations, so it’s important to understand any state-specific considerations.

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