You’ve worked hard for your stock compensation and expect it to provide you with wealth for a long and happy life. Nevertheless, it’s important to find out what would happen to your restricted stock units (RSUs) or stock options should you die. How would the outstanding equity awards that you earned be treated under the plan and passed along to your family members or other beneficiaries?
In this article, I present five things to know about the impact of death on your equity compensation. They are important points I’ve seen in my over 25 years as editor-in-chief and co-founder of myStockOptions.com. You should review these matters with a financial advisor and your family members. I use “stock grants” to refer to all equity compensation, unless there is something different to know about a particular type of grant.
1. Special Provisions For Death
It may seem creepy that death is a type of employment termination under your stock plan—but that is how stock plans address it. Examine your company’s plan and each grant agreement for terms that will provide special treatment if you die.
Stock plan provisions relating to death are usually more employee-friendly than those for other types of job termination, such as being laid off, getting fired, or quitting to work for another company.
2. Vesting Often Does Not Immediately End At Death
For instance, upon your death the stock plan may continue the vesting of all or a portion of your grants instead of terminating the vesting and causing the grants to be forfeited, which is common for a regular job termination. Some stock plans even accelerate the vesting after the employee’s death.
Example: You die when only 40% of your 10,000 stock options have vested. Although in a standard job termination the remaining 6,000 options would be forfeited, upon your death your grant agreement instead accelerates the vesting. The entire 10,000 vested options may be exercised by your estate, trustee, or beneficiary under the terms of your stock plan documents. The options will still need to be exercised within a specified period.
Even if the grant agreement does not have special death provisions, sometimes a company will accelerate the vesting or payout at death should it have the flexibility to do so. That is more common for senior executives and long-term or key employees.
Alert: The treatment of unvested equity awards upon death depends on the terms of your stock plan and the specifics of each grant agreement. Read these and ask a qualified financial advisor for any help if you cannot understand them.
In its 2024 Equity Incentives Design Survey, the National Association of Stock Plan Professionals (NASPP) observed the following related practices with RSU grants among the companies in its survey group. Most of the companies continue vesting for at least some of the grants, and over half of them accelerate the vesting for all of the grants:
3. Option Exercise Period Extended
After an optionholder’s death, the post-termination exercise period (PTEP) for vested stock options is very likely to be longer than it would be after job loss or resignation.
For example, even if a stock plan normally permits optionholders just 90 days to exercise after a termination of employment, the plan is likely to allow estates or beneficiaries up to one year from the date of death. That longer period can be helpful when no beneficiary is designated for the stock options and a personal representative/executor needs to be appointed during the probate process.
Alert: Your stock options will still have the same maximum term before they expire, such as 10 years. That is not extended by your death. If the option term ends sooner than the extended PTEP, your beneficiaries will have only until the end of the term to exercise the options.
Surveys show that most companies extend the exercise period after death, often significantly. According to the 2024 survey by the National Association of Stock Plan Professionals (NASPP), a 12-month extension period is given by 43% of the responding companies. Moreover, at 25% of the companies, options can be exercised at any time during the remaining option term after the optionholder’s death. Options not exercised before the expiration date are forfeited.
For incentive stock options (ISOs) the federal tax code states that, to retain the special ISO tax treatment, the options must be exercised within three months after you leave the company. Otherwise the ISOs become nonqualified stock options (NQSOs). However, at death that rule no longer applies: ISOs retain their special tax treatment for the full option term.
Any stock acquired from an ISO exercise or through a tax-qualified employee stock purchase plan (ESPP) may be transferred after your death to your estate (or beneficiary) without triggering a disqualifying disposition that loses the special tax benefits. With an ESPP, most plans automatically withdraw you at death from participation in future share purchases, with any money withheld from payroll deductions for purchases refunded to your estate.
4. Negotiate For Special Treatment At Death
Even when no special provision for death appears in the grant or severance agreement or other documents, you can still ask for it as part of any negotiated hiring package. For example, if you’re leaving behind valuable stock grants awarded by your former employer, you can negotiate for accelerated vesting of your new-hire grant for certain situations, such as death.
5. Tell Those Who Need To Know
The executors or administrators of your estate or trust, and any named beneficiaries for your grants, should know about the special provisions related to death in your stock awards. After your death, your estate or beneficiary may exercise any vested options, according to the option grant’s terms and deadlines, along with presenting estate-planning documents (e.g. a will or trust).
Alert: Your death does not extend the length of the stock option term, even if there is a dispute. Options not exercised before the term’s end are forfeited.
Shares that you own are transferred as designated by your will, trust, or beneficiary designations for your accounts. Even if your stock plan does not permit beneficiary designations, the retail brokerage firm that holds your company stock will usually allow them.
Additional Resources
See also my YouTube video about the impact of death on equity compensation.
For more details about the impact of death on your outstanding equity grants, including taxes, see the Life Events and Estate Planning sections on myStockOptions.com. Another Forbes.com article that I wrote covers some of the taxation and advanced topics related to death planning: Estate And Charitable Planning For Stock Options, RSUs, And Company Stock.
Read the full article here