Executive Spotlight: Have You Planned for the Possibility of Disability?

In the event of your disability or death, a clear statement about how you want your concentrated stock to be managed can be invaluable to your family and trustees. This document, known as a Statement of Wealth Transfer Intent (SOWTI), can help you:

• Articulate your philosophy of wealth

• Allow for a more purposeful transfer of wealth

• Provide critical context for family members and promote family harmony by avoiding misunderstandings

Your SOWTI should include a specific discussion of the role the company stock has played in your life, as well as your wishes for its retention or sale in the event of disability or death. Learn more about how to create a SOWTI.

If you were to become disabled — either while employed, or during retirement while you still own a large concentration of company stock — your equity compensation plan could force a change in your holdings. Some company plans may treat payouts due to events beyond the executive’s control (e.g., disability or death) more liberally; however, there is no guarantee or universal treatment of awards. Decisions often are made on a case-by-case, grant-by-grant, company-specific basis with provisions contained either in the stock option agreement or made by the board or compensation committee.

Many companies’ equity compensation plans allow for partial or full acceleration of vesting upon an executive’s death or disability. On the other hand, some stock awards will be forfeited in the event of disability, especially if an executive does not meet specific criteria related to age, years of service, performance criteria, event triggers or employment status.

Disability may also result in accelerated vesting of equity compensation, changes in valuation related to market conditions and stock price variations, cash flow impact and associated tax liability.

Each company and individual award plan may have different requirements and triggers for vesting or forfeiture. If disability or death is an event that accelerates the vesting of shares, your concentration risk could increase substantially. In some cases, the clock starts ticking upon death or disability, which may result in financial consequences for your family if they fail to act quickly.

Review your employment agreement and equity plan documents to confirm how stock awards and options would vest in the event of disability or death. Share these documents with your advisors, successor agents and trustees to ensure your plan accounts for these terms.

Revocable trusts are a common, and valuable, strategy in wealth and estate planning. However, the trust should contain clear and comprehensive direction on the retention or disposition of the stock. Multiple options exist for management of concentrated stock ownership, including naming an advisor to direct sales of the stock or granting trustees the discretion to diversify the holding over a longer period.

In the absence of clear direction, your trustees could be forced to sell some or all of the stock because of the duty of diversification. If your wish is to retain the concentrated position without exposing your trustee to potential liability for failure to diversify, you must include specific provisions about retention in the trust documents. You may wish to consider directing your trustee to retain a small portion as a legacy for your family rather than retaining the entire position.

Commit to establishing and executing a detailed plan that allows for the possibility of immediate disposition if the stock price of your concentrated holding increases dramatically, or if greater liquidity needs arise. For instance, your trust may grant the trustee authority to dispose of stock up to a certain amount or engage in hedging the concentrated position to reduce risk of loss and provide income. Your trustee may need to consult with your company’s legal team regarding restrictions, reporting and other trading requirements. Trading restrictions for stock may be lifted in the event of disability, which could allow your trustee and family members to engage in sales or gifts involving the stock, including to meet liquidity needs for your family.

A clear plan to set forth specific guidance regarding your concentrated holdings may prevent costly errors and missed opportunities by even the most well-intentioned trustee. Adding a provision to your trust with distinct language that addresses the duty to diversify and spells out your wishes in unambiguous language may avoid these risks.

It is critical to grant authority to a third party to act on your behalf and make decisions about your stock awards and options should you become unable to do so. Some companies permit designation of an authorized party or agent of a financial power of attorney to transact in company stock in the event of disability. However, a more effective option may be to designate the trustee of your revocable trust for all stock transactions.

Your appointed agent will be tasked with important, consequential decisions, including whether and when to exercise options, and whether to sell some or all of the shares received from exercising or from restricted stock vesting.

No matter whom you select, be sure they have “the skill and the will” to make equity compensation decisions and manage your stock concentration wisely.