On this week’s episode of Your Questions, Answered Lindsey McCool and Brian Leitner discuss how to develop an executive compensation plan, and answer the following question:

“How do I leverage my complicated executive compensation package for retirement and gifting?”

Do you have questions you’d like answered? Email them to [email protected], and we’ll provide answers.

Transcript:

Brian Leitner: You have questions? We have answers back with another quick clip. So Lindsey, we had a question that came into the show. It’s an executive. They have a pretty complicated executive compensation package, and they had some questions on, “Well, how do I think about this as it relates to my retirement, potentially giving to family, giving to charity?” I know that’s a big question and there’s a lot to it, but if you could provide maybe just a high-level overview of things to think about that might be helpful. 

Lindsey Hart McCool: Absolutely. Executives have lots of moving pieces when thinking about their retirement. Some executives are eligible for a pension plan, and we think of that as like a bond or a fixed income piece of their retirement. Most executives have access to stock awards. When we think about those, we look to maybe sell those once they vest, pay the taxes and then further use that money to diversify the portfolio for retirement. 

Brian: Yeah, it’s interesting. There’s obviously tax consequences as it relates to an executive’s compensation program. How do taxes work as it relates to gifting the executive comp? Whether that be  after they diversified, let’s say, or even gifting shares that they might own to family members or other loved ones. How might that work? 

Lindsey: Well, when you think about gifting shares of stock, typically you want to gift the shares that have the lowest cost basis or the lowest purchase price. The reason for that is because typically charities don’t have to pay or won’t have to pay tax on that, where the executive would have to pay tax if they decided to sell it and then gift the proceeds. So we look to have executives leverage low cost basis stock when gifting and there’s lots of other strategies to consider for them when gifting. There’s also donor-advised funds that allow them to kind of pool investments in cash over time, then they can later gift that out. And there’s also quite a few charitable trusts that maybe an executive might want to consider. 

Brian: Yeah. All different tools in the toolbox depending upon someone’s given situation. Outside of charity, if you had assets that you wanted to give to loved ones and family members, I know we talked a little bit about this actually just a couple of weeks ago, but in terms of gifting, maybe some of the low-cost basis to children and other family members and, and why might you do that? 

Lindsey: Absolutely. That’s a good point to bring up. Typically an executive would want to keep the higher cost basis stock and that they would sell, and they’d have lower tax bill on that typically. And then maybe the low-cost basis to go to children, because they’re typically in a lower tax bracket. The other thing to think about is that executive passes away that stock receives what’s called a step-up in the cost basis and that’s valued as of the date of death of that owner. And so there might be some things to think about where you might want to keep some stock with that lower cost basis to get a step-up at that date of death. 

Brian: Just to review that, when you gift shares to someone in a lower tax bracket, it is children, that cost basis, what you paid for, will transfer to the person, the beneficiary, the person that’s receiving that gift. So that follows them, versus when someone inherits an asset and they receive that step-up in fair market value, that person, that beneficiary that receives that can sell it the next day and not pay any taxes. Did I get that correct? 

Lindsey: You did, just right. 

Brian: Okay. Terrific. Lindsey, thank you very much. I know this is a complex area with a lot of different moving parts to it, but I appreciate you just simplifying a few aspects of that for us. So, thanks again for being on the show. 

Lindsey: Thank you, Brian. 

Brian: And if you or anyone else has questions, they can go ahead and feel free to email us at [email protected]. Thanks for watching.