Question reguarding the transferability of stock options

[Ches]

What is the name of your state (only U.S. law)? North Carolina

I am the Executor of my sisters estate and her only heir. I have almost finished administering her estate and only have left to file her final tax returns and deal with this last potential asset. Sis had stock options issued to her by her company when the company she worked for spun her division out as a seperate company. All the employees were issued these stock options at the time of the spinout and these options sit now in an individual account at a brokerage in my deceased sisters name. The brokerage who handeles all these employee options for the issuing company tells me that these options are only transferable to the Estate of the deceased and that the estate can not transfer the options to any beneficiary of the estate but that only the estate may execute these options should they come in the money in the future and then disperse the funds after execution. These options are fully vested and do not expire until 2014 so I fully expect them to be of some value in the future as they ar not very far out of the money now. I have a document that the company issued with the option certificate at the time of the spinout and giving of the options that is the "Stock Option Award Agreement". In this legal document all the legal issues reguarding the agreement are spelled out. And I agree with them that there is a section that states that the options are nontransferable but... in that section there seems to me to be an exception due to the situation of death. Let me copy the legal wording of the aplicable section fron this legal agreement that I feel is relavant and grants the options the ability to be transferred in this situation.

In item number 5 it is stated as follows:

5. NONTRANSFERABILITY. The Stock Options awarded pursuant to this Award Agreement may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated("Transfer"), other than by will or by the laws of descent and distribution, except as provided in the Plan.

There is additional wording under 5 adressing the forfeiture of the options due to the attemt to tranfer the options in a prohibited manner rendering the agreement void.

My question is therefore is there not an exception that allows for the transfer in this wording of 5 above as relates to this situation. We have a will probated and stating that all property is to be left to my brother. Am I reading the above wording wrong or am I just not getting to the proper people in the company who have the good sense to reade this agreements words in detail and give me the proper treatment. If I am seamingly upset then you are right is detecting that in my tone here as I am very anxious to close my sisters estate and close this chapter in my life and this is forcing me to keep her estate open till these options expire or are exercised.

Thanks for any opinions and advise!

 

[latigo]

It seems to me that the non-alienation clause is self-explanatory. Otherwise wouldn’t the options revert/forfeit upon the death of the holder?

But why aren’t you addressing these questions to the attorney you hired to represent you in administering the estate? If you haven’t employed the attorney, then why not?

A very wise man once wrote “A person who represents himself in court has a fool for a client”. Then maybe Mr. Lincoln didn’t have you in mind.

 

[Ches]

Seems obvious to me as well!

The clause to me seems to obviously allow the transfer of the options in the event of death. My problem is that the company seems to have no inside person responsible for enforcing this policy properly. The company has farmed out these options to a individual brokerage account who when called says they have no power to do anything other than what the company tells them they can do. I have talked to this brokerage on several occasions and have also called the company several times and bounced around to numerous dead ends there. So what would you suggest be done when one cant get to the proper person who has the power or the incentive to actually pick up the document and read it? You may read it and think it is obvious but unless you can talk to someone in power that agrees with you and is willing to do something about it then what are you going to do. I knw you said hire the attorney and I have hired him but at $250 an hour I am not sure I want to send him after some options that are currently out of the money and since there just arent that many it seems a bit overkill. So I thought I would try to get some advice here on how to proceed as sort of a separate approach. My attorney knows of these options and has said that normally they are transferred to the persons estate and then the estate transfers them to the proper beneficiary. But the company will not allow the brokerage to facilitate the second transfer to the heir at law untill the options are exersized. I think I have a case of no one is or wants to be in charge. Should I pick up the phone once again and call the company and insist on speaking with someone in their legal department?

 

[ShyCat]

As I understand it, they are correct in transferring the stock options to the estate. You may be a beneficiary named in the will (or by your state's intestate provisions), but presumably you are not a designated beneficiary on the stock options. Apparently the stock options were not in a TOD (transfer on death) account, so they must be distributed to the heir(s) through probate, which ensures that the deceased's debts are paid before the remaining assets are distributed. You can't simply bypass that by pointing to the will and expecting the institution to hand over the options. The stock option account itself would have required a named beneficiary for that to occur.

 

[Ches]

I agree totally

with what you are saying and understand that there is good reason as you have said for this to be the procedure. The thing I do not understand is that the brokerage will not allowing the estate under the supervision of the court to transfer the options after they have been transferred into the estate to the heir of said options. They are going to force me to keep the estate open or to reopen the estate at a later date to execute the options and distribute the proceeds to the heir after the execution should the options come into the money that is. I dont understand the brokerage and the company not allowing the transfer of the options by the estate to the proper heir. I do understand why the company or brokerage would want to transfer the options to the estate for proper distribution and handeling first though.

 

[ShyCat]

Ah, sorry, I missed that.

When an employee exercises non-qualified stock options (NQSO), which these must be, the difference between the exercise price and the grant price is taxable income reported on a W-2. It makes sense that the employer cannot issue a W-2 to a non-employee (you). W-2 income is paid to the employee or to the employee's estate.

 

[Ches]

I had not given that much thought

at this point. But I would assume that the gain would be taxable as a long term taxable gain and not sure the company would have to issue a W2 on that or not as they are not salary. Im quite certain they are reportable by the heir upon exercise as a income though. I just think the company is wrong about their position of not letting the estate transfer the options to the next of kin. Thanks for your input.

 

[ShyCat]

No, for NQSOs the difference between grant price and exercise price is ordinary income reported on a W-2. It is not a capital gain. NQSOs are a form of employee compensation.