Client Advisory Services Flashcards

A high-net-worth executive wants to transfer unvested stock options to a family member to reduce estate taxes. Which type of equity award is generally transferable to family members or trusts if the plan allows?

Answer: Non-Qualified Stock Options (NQSOs)

NQSOs can be transferred to family members or trusts if the equity plan permits, whereas ISOs lose their tax-favored status upon transfer to anyone other than by death.

A client asks about the tax treatment of dividend equivalents paid on unvested RSUs. How are these dividend equivalents generally taxed?

Answer: As ordinary income when paid, or at vesting if deferred, subject to FICA

Dividend equivalents on unvested RSUs are generally taxed as ordinary compensation income (not qualified dividends) when paid or when the award vests, and are subject to FICA taxes.

Which of the following scenarios constitutes a 'short-swing profit' recoverable by the company under Section 16(b)?

Answer: A director purchases stock and sells shares of the same company within a 6-month period at a profit

Section 16(b) requires insiders to return any profits from purchases and sales (or sales and purchases) of company securities occurring within any 6-month period.

Which plan feature allows participants to elect to defer receipt of vested RSU shares to a future date while complying with Internal Revenue Code Section 409A?

Answer: A deferred compensation or deferral election feature

A deferred compensation or deferral election feature allows participants to elect to defer RSU settlement to a future date, but the election must comply with Section 409A's strict timing and payment trigger rules.

A participant exercises ISOs in Year 1 creating a significant AMT liability, then sells the ISO shares in Year 2 in a qualifying disposition. What tax benefit may be available in Year 2?

Answer: An AMT credit generated in Year 1 that can offset regular tax in Year 2

When AMT is triggered in Year 1 by an ISO exercise, the AMT paid generates a minimum tax credit that can be used to reduce regular tax liability in future years when regular tax exceeds AMT.

In a tender offer scenario where participants are asked to exchange underwater options for new options or cash, what is the primary SEC concern that requires careful compliance?

Answer: The exchange offer is subject to SEC tender offer rules, requiring a formal offer document and minimum open period

The SEC treats option exchange offers as tender offers subject to Regulation 14E and other tender offer rules, requiring a formal schedule, minimum 20-business-day offer period, and disclosure obligations.

When advising a client on the financial planning implications of a large equity vesting event, which of the following tax planning actions should typically be evaluated BEFORE the shares vest?

Answer: Increasing 401(k) deferrals to reduce W-2 income subject to the additional Medicare tax on the vesting income

Increasing 401(k) deferrals before vesting reduces W-2 wages and may help limit exposure to the 0.9% Additional Medicare Tax on high-income earners, as deferrals lower FICA-taxable compensation.