Investment Strategies Flashcards

A charitable remainder trust (CRT) can be used in equity compensation planning primarily to:

Answer: Sell appreciated stock tax-free inside the trust and receive an income stream plus a charitable deduction

A CRT allows the donor to transfer appreciated shares, which the trust sells tax-free, reinvests for diversification, and then pays an income stream to the donor, while the donor receives an upfront charitable deduction.

Which of the following scenarios would result in a 'disqualifying disposition' of ISO shares?

Answer: Selling ISO shares eight months after exercise

Selling ISO shares within one year of exercise (or within two years of grant) triggers a disqualifying disposition, causing the spread to be taxed as ordinary income rather than capital gain.

What does 'net exercise' (also called share withholding) mean in the context of stock option exercises?

Answer: Shares otherwise deliverable are surrendered to cover the exercise price, resulting in a net share delivery

In a net exercise, the employee surrenders enough shares at fair market value to pay the exercise price, receiving only the net shares remaining, avoiding any cash outlay.

When an employee uses a stock swap to exercise NQSOs, which tax consequence is most important to understand?

Answer: The holding period of tendered shares carries over only to the replacement shares covering the swap

In a stock swap, the tendered shares are treated as exchanged; the new shares received in lieu of the tendered shares carry over the original holding period, while the remaining net new shares start a fresh holding period with a cost basis equal to the FMV at exercise.

Which metric is most relevant when assessing whether an employee's equity compensation creates an over-concentrated position?

Answer: The percentage of total net worth represented by employer equity

Financial planning best practice focuses on employer equity as a share of total net worth to gauge concentration risk, since it captures both vested and liquid equity relative to all assets.

A company's equity plan prohibits hedging of company stock by employees. Which instrument would most likely violate this prohibition?

Answer: Entering into a variable prepaid forward contract on employer stock

A variable prepaid forward contract locks in a minimum sale price for employer shares and is typically classified as a hedging transaction prohibited by most equity plan anti-hedging policies.

For estate planning purposes, which of the following equity awards can be transferred to a family member or irrevocable trust during the holder's lifetime?

Answer: Non-Qualified Stock Options (NQSOs), if permitted by the plan

NQSOs may be transferred to family members or trusts if explicitly allowed by the plan document, whereas ISOs lose their ISO status upon transfer to anyone other than the estate.