An executive is often faced with the problem of finding the money to exercise his Stock options. There are a number of alternatives available to him.
o He can arrange for a loan from the company or from existing pension or profit-sharing funds.
o He can take a bank loan. In most cases collateral will be required, however. He will have to put up other securities in addition to the optioned stock. This is because the loan is made to buy stock and the usual margin requirements for this type of transaction must be met. Once again, the interest expense will not be deductible unless the loan is secured by a residence.
o If the option is exercisable over an extended period of time, he can exercise part of the option and then use this stock to pay for the new stock as each installment is exercised, without gain on the stock used in payment.
Regardless of how he arranges his loan, of course, he will have to pay the money back. If he’s bought in a rising market, however, that can be fairly painless. He can sell some of the stock, repay the loan, and still have his profit.
Stock Options and Estate Taxes
If an executive dies before he’s exercised his stock options, what happens then?
Sometimes the options are not exercisable and therefore lapse. Or the estate may be allowed to exercise them. If so, they are considered part of his taxable estate. His estate will have to pay an estate tax on the value of the options, i.e., on the difference between the option price and the market price at the time of his death.
This estate tax liability, incidentally, occurs whether or not the estate actually exercises the option. Thus an estate tax can be assessed even though the estate doesn’t receive any profit. This usually means that the estate will want to exercise the remaining options. But the cash to do this may be hard to get because of the margin limitations on stock-purchase borrowing. Key executives therefore would be well advised to provide for sufficient life insurance proceeds to make ready cash available for this purpose, especially if their stock options are substantial.
The post Financing Stock Options first appeared on Stock Android Rom.
The post Financing Stock Options appeared first on Stock Android Rom.
