How to Exercise Stock Options Upon Death
Upon the death of an employee with vested stock options, only an individual legally empowered to do so may exercise those options. The terms of the stock option plan will usually provide a time limit within which this must occur, often within one year of death, or the options can be lost. The actual exercise of the options must be done through the employer, or the broker or agent designated in the stock options plan.
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Instructions
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Show power of attorney. An individual designated as the decedent's attorney-in-fact through an irrevocable power of attorney specifically granting authority over the options may be able to exercise the options on behalf of the estate. If the power of attorney document provides instructions on how the options and any proceeds must be handled, the attorney-in-fact is bound by those terms. Otherwise, they generally have a fiduciary duty to act in the best interest of the estate.
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Become executor or personal representative. If no power of attorney has been granted, an individual appointed by a probate court as executor (or personal representative) of the decedent's estate can usually execute the stock options according to the options plan.
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Inherit the options. Not all states allow for stock options to be inherited, but in the event they can be, a beneficiary of the estate can inherit options and exercise them. Unfortunately, the probate process can easily take more than a year, creating the risk that the option plan might restrict their ability to exercise the options.
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Provide documentation. Before an individual with the legal authority to exercise stock options of a deceased party can do so, they must provide to the employer or their designated agent the power of attorney document or their letter showing their designation as executor, and might have to also provide a certificate of death and affidavit of domicile. A beneficiary to the estate inheriting the options might have to provide a court order or have the executor intervene to transfer the ownership of the options to the beneficiary.
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Tips & Warnings
Get a copy of the stock options plan from the employer as soon as possible. Not only will the plan describe any time restrictions of exercising stock options upon death, it will include instructions on how to exercise the options, which can vary. In some cases, a simple phone call can authorize the exercise, but in other cases a written request might be necessary. Most stock options plans also have loan programs to aid in the options exercise without a capital outlay, but these may or may not be available upon death.
Exercising stock options can create a tax liability for an estate or beneficiary depending on the final sale price of the underlying stock and the duration for which the stock is held. Exercising a stock option only gives the owner the right to purchase shares at a certain price, which might not be lower than the current market level, making the options essentially worthless. Because the stock options plan can limit the time in which stock options of a decedent can be exercised, this is a greater risk than it was to the original owner of the options.
