Money Matters

Ultra High Net Worth Tax Planning Strategies to Manage Restricted Stock Units

Restricted stock units, commonly referred to as RSUs, are becoming an increasingly popular equity compensation option not only in large corporations and publicly traded companies but also in regions like San Diego with various start-ups and tech companies. Their unique structure offers employees a tangible stake in their company’s success, which aligns their interests with those of the company. For individuals with substantial wealth, particularly those in the ultra-high-net-worth bracket, navigating the intricacies of complex financial instruments like RSUs takes on an added dimension of importance. Special considerations and advanced tax planning for ultra-high-net-worth clients can be pivotal in preserving and growing wealth.

What are RSUs?

RSUs represent actual shares of company stock granted to employees but subject to specific conditions outlined in a vesting schedule. This means employees gain full ownership of the shares only after satisfying predetermined criteria, such as remaining with the company for a specified period. Once vested, employees can sell or hold the shares as regular shareholders.

By tying ownership to performance goals, a vesting schedule, or other factors, this approach, in theory, incentivizes employees to stay at a job longer until the stocks vest. This creates a sense of shared responsibility and can help motivate employees to actively contribute to the company’s success, growth, and stock value because they “have skin in the game.”

However, managing RSUs involves more than the benefits of stock ownership. There are factors to consider with your RSUs that could affect your tax liability and net worth. Continue reading if you’re exploring tax strategies for ultra-high-net-worth individuals with RSUs or how to avoid high or double taxation. 

Do RSUs Count Toward Net Worth?

Yes, RSUs contribute toward your net worth because they become part of your assets as they vest. This is important because having a complete picture of your assets and financial standing can help you make informed decisions about your goals, investments, retirement, risks, and estate planning.

Tax planning and managing your exposure are crucial when holding RSUs and diversifying your net worth. Here are more components to evaluate:

  • Tax Liability: If you have a lot of highly appreciated RSUs, they could pose a significant tax bill once vested or overexposure of the stock in your portfolio. 
  • Overconcentration: This type of stock concentration could result in a lack of diversification that could increase your risk if too many of your assets are tied up in your company’s performance. If a significant portion of your net worth is in RSUs, you may need to diversify to spread risk across different asset classes.
  • Risk Mitigation: Understanding how much of your net worth is represented by RSUs can help you assess risks associated with changes in the stock’s value or volatility that could expose your net worth to more risks. 

Tax Strategies to Manage the Amount of Stock You Hold

Do you find yourself in a situation where you’re trying to balance your exposure to the company that pays you and the company’s stock holding, the latter of which is becoming a more significant part of your overall net worth? Finding the right balance between your connection to your company and the amount of stock you hold is imperative. If you have concerns about the amount of company stock you hold relative to your overall net worth, it’s best to explore various strategies to consider as they suit your situation. Whichever method you choose to reduce your current exposure has a different tax implication, so it’s critical to consult a financial planner who can provide tailored insights and ensure you fully understand the approach before executing a strategy. 

How Do I Avoid Taxes on RSUs?

The sale of shares acquired through RSUs can trigger capital gains taxes, which could affect your overall financial picture. One way to manage your tax liability is through charitable gifting. If you’ve held highly appreciated stock for over a year, you can gift it to the charity of your choice. This can help you engage in philanthropy while providing a tax deduction to help avoid built-up capital gains.

How Do I Avoid Double Taxation on my RSUs?

Double taxation is a concern with RSUs because they can be subject to taxation at two separate points:

  • Vesting: When RSUs vest, they are considered taxable income for the year, which may increase your overall tax liability.
  • Sale of Shares: When you eventually sell the shares, any increase in value from the time of vesting to the time of sale may trigger a capital gains tax, so you could be taxed on the stock’s appreciation.

To plan accordingly and mitigate double taxation, you may consider holding the stock longer to qualify for lower capital gains tax rates or engaging in dollar-cost averaging. We suggest working with a financial advisor to discuss your options and develop a strategy that helps minimize your tax liability before your RSUs vest or you plan to sell. 

What is Dollar-Cost Averaging?

Dollar-cost averaging involves selling small amounts of your stock over time using existing shares or new stock you receive through your RSUs that continue to vest. By spreading out your tax liability over several years, you may be able to reduce your financial impact. 

Managing RSUs: Other Tax Strategies for the Ultra-High-Net-Worth

In addition to the strategies we mentioned above, there are several other critical aspects to evaluate when managing your RSUs effectively, including 83(b) elections, transitioning from your company, and special considerations of privately held companies. 

Hedging Your Exposure 

Ultra-high-net-worth tax planning requires sophisticated strategies as you navigate the complexity of RSUs. In addition to charitable gifting and dollar-cost averaging, hedging your exposure can help control your risk from stock concentration. RSUs are subject to market volatility, so hedging your exposure refers to minimizing potential financial risks associated with the asset and protecting against price movements that could have a negative impact. Implementing hedging strategies can help reduce tax liability, capture gains, diversify, and defer certain tax events. We recommend working with a financial planner to help you employ positions that can help preserve your stock’s value and offset any losses.

Selling a Large Amount

You may also consider selling a large amount of your RSUs. If you have excess cash to make a lump-sum tax payment, you may consider “ripping off the bandage” and reducing your stock exposure as a result. Calculate how much cash you need, especially if the stock value has significantly increased. 

You should also think about how selling a large amount could affect your retirement income and other financial needs. If you’d like to participate in your company’s long-term growth or anticipate its value will increase, you may consider selling your RSUs gradually. One strategy we’ve shared with clients is to sell a piece of the shares upon retirement, sell another portion later, and keep the remainder for the long term, provided it is less than 10–15% of your overall portfolio. Learn more about other equity compensation tax mistakes to avoid in your retirement planning.

Deciding to Make an 83(b) Election

Whether to make an 83(b) election is another crucial decision. This election allows you to pay taxes on the value of your RSUs when they’re granted rather than when they vest. This complex choice can significantly affect your tax liability and financial planning. Consult a professional with expertise in equity compensation to understand how this option can affect your financial situation. 

What to Do with RSUs if You Decide to Leave Your Company

You should have a clear plan in place should you decide to leave your current company. Depending on your company’s policies and agreement, you may need to make decisions around vesting timing and the number of RSUs you can retain, what you may lose if you leave within a certain period, or options to cash out your vested RSUs. Understanding your options and associated tax consequences during this transition is critical. You can also refer to this checklist for managing your stock options when you leave a company.

RSU Considerations for Privately Held Companies

It’s helpful to understand the differences between how public and private companies operate. If your company is privately held, there may be more factors you must navigate, such as liquidity options and valuing your RSUs. For example, unlike publicly traded companies, privately held companies may have limited options for selling or trading RSUs, and determining the fair market value may be more complex due to limited data and other challenges. A professional can help you explore alternative strategies to maximize benefits and manage risk. 

Tax-Loss Harvesting

If the value of your company’s stock has declined significantly, you might want to explore the option of tax-loss harvesting. This strategy involves selling a security that has declined in value, which allows you to realize the loss for tax purposes and repurchase it later. The approach also includes immediately purchasing another security comparable to the one you sold to ensure your portfolio doesn’t change significantly regarding allocations, exposure, and holdings. 

In addition to maintaining your original investment profile, tax-loss harvesting offers the benefit of offsetting current tax liability by balancing taxable income and capital gains. It’s important to approach tax-loss harvesting thoughtfully and seek the guidance of a professional, as it involves a nuanced understanding of tax laws and market dynamics. Learn more about tax-loss harvesting and other factors you should consider, such as the loss amount, the wash sale rule, and eligible account types.

Managing RSUs and How CCMI Can Help

Remember, these are general guidelines, and you should always seek personalized advice based on your financial situation. Speaking with a financial planner specializing in RSUs and equity compensation and with experience with various company structures can help provide insights to inform your decisions. They can help you assess your unique situation, understand the nuances of your RSU agreement, and develop custom plans that align with your goals and risk tolerance. 

At CCMI, we help you take a broad view and pinpoint the best strategy for your unique situation to proactively avoid unwanted tax surprises now or down the road while optimizing the long-term value of your RSUs. Here are more ways we can help you manage your RSUs and tax strategy:

  • Tailored Financial Strategy: Our dedicated team specializes in comprehensive financial plans that consider your equity compensation, investments, risk tolerance, goals, and overall financial and tax circumstances. We integrate all facets of your financial well-being, such as estate planning, risk management, and factors specific to you such as the tax implications of living and retiring in San Diego.
  • Strategic Diversification: We implement diversification and investment strategies to help manage the risks associated with overconcentration in assets and stock. We can help you achieve a balanced portfolio that aligns with your goals by spreading your investments across various asset classes.
  • Tax-Efficient Planning: We’re experts in helping our clients navigate the intricacies of equity options and their tax implications. We’ll assist you in creating, implementing, and overseeing strategies for handling stock, whether it’s through exercise, sale, or transfer. We aim to manage your tax liability carefully, considering various income brackets, life stages, and objectives to ensure alignment.

Understanding your RSU agreement, the taxability of the stocks you’re receiving, and the risk you’re willing to take can help you build an investment strategy with more confidence and possibly financial benefit in the long run. As your financial partner, we will help you proactively address concentration risks, maintain portfolio balance, and allocate assets in line with your established targets. If you want to learn more about your RSUs or any other types of stock compensation, please reach out to our team; we will be happy to discuss your individual experience and needs.

PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at https://myccmi.com/important-disclosures/

CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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Matt Showley is a CERTIFIED FINANCIAL PLANNER™ professional and Accredited Estate Planner®️ who advises individuals, families, and business owners on portfolio management, financial planning, tax and estate planning, real estate, cash-flow modeling, and education planning. In addition to his role as principal and owner, Matt continues to oversee the firm’s operations and work with new and existing clients. Matt joined CCMI in 2006 and has contributed significantly to the firm’s wealth management and financial planning processes and client relationships.

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