The Advisor Institute: Coach's Corner
Talking equity awards: The early bird catches the worm

Practical messages intended to help you elevate the success of your practice.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By David GordonDirector, Eaton Vance Advisor Institute

      Many advisors shy away from conversations about equity awards, as they believe it to be the stock plan administrator's responsibility. Is it, though? Stock plan administrators generally perform a record-keeping function. You, on the other hand, can be an advisor for each client's full balance sheet — an After-Tax Advisor®.

      In the early months of the year, After-Tax Advisors focus on equity awards that have already vested or will soon vest. Since a majority of American companies use the calendar year as their fiscal year, equity awards are often granted in December or January. As a result, the vesting of awards from prior years also clusters in December and January.

      There are several advantages to discussing awards early in the year, near their vesting dates or at their vesting anniversaries:

      1. When restricted stock and restricted stock units vest, most stock plan administrators withhold ordinary income tax at the supplemental income tax rate of 22%. Clients in a higher tax bracket will likely need to make an extra tax payment before year-end — a long way off — to avoid penalties. Having these conversations early in the year can help clients determine if making estimated tax payments throughout the year can help them catch up.
      2. Exercising incentive stock options (ISOs) creates an alternative minimum tax (AMT) preference item. The "bargain element" must be included in income for AMT purposes — unless the shares are disposed of before the end of the same calendar year.1 You can discuss how exercising ISOs in the early months of the year gives clients more time to decide whether to keep the shares (and potentially pay AMT) or sell the shares before year-end.
      3. High-income clients who have taxes underwithheld at the supplemental income tax rate may have recurring tax shortfalls year after year. While discussing their tax outcomes, help them determine if increasing taxes regularly withheld from their paychecks could make up the shortfall. Remember to point out that the earlier they adjust their withholding, the more pay periods they have to make up the difference.

      Bottom line: Step into the tax planning arena and advise clients on their equity awards early in the calendar year.

      tax forward