By Robert Fritz, Head of Executive Advisory

If you’re like many senior executives, the turn of a new year marks the end of one compensation period and the beginning of another. As you receive your annual incentive payment – typically in cash and deferred stock grants – you’ll want to think about how to enhance your future proceeds and minimize your taxes. The decisions you make now could impact your financial objectives.

Determining the best course of action can be challenging. In the first quarter, many executives will see their company stock concentrations rise as their restricted stock units (RSUs) or performance-based stock units (PSUs) vest into their accounts. This shift necessitates careful and strategic decision making. Should you sell your vested stock immediately and use the proceeds to diversify your portfolio? Or, if you’re optimistic about the company’s earnings potential, should you hold on to vested stock in case it appreciates? And what are your options if you don’t want to sell it all at once – would a staggered sale, stock transfer or combined approach work best?

To help guide you through the planning process, we’ve laid out five key questions to consider. While these choices are focused primarily on newly vested stock grants, you may want to think about reviewing all of your savings and investment elections – including deferred compensation plans and 401(k) contributions – to ensure you’re on track to meet your future wealth goals.

1. Are you able to sell your newly vested stock?

Before selling your newly vested RSUs and PSUs, it’s important to be aware of various restrictions designed to ensure compliance with legal, ethical and strategic considerations. These constraints may include:

• Anticipation of a significant corporate event: If you expect your company to make a major corporate announcement soon, this could prevent you – as a corporate leader – from selling your shares, as it might be perceived as insider trading.
• Alignment with corporate culture: Selling vested stock might be inconsistent with your company’s corporate culture, potentially leading to negative repercussions (both internally and externally) if you’re seen to be showing a lack of confidence in the company’s future.
• Share ownership requirements: As a corporate leader, you may be required to maintain a certain level of share ownership, which could limit your ability to sell. 

Once those conditions have been met, selling your newly vested RSUs and PSUs should be fairly straightforward. However, more questions may soon arise, particularly around timing and execution.

2. If you want to sell your vested shares, should you do so right away?

If you’re satisfied that the stock is fairly valued, your best choice may be to accept your fresh round of new RSUs or PSUs, which will be taxed as they vest, and then sell them to maintain your desired portfolio allocation. Unless the stock experiences significant price movement, the tax implications of the sale are likely to be minimal. (As a reminder, however, public company executives, especially named executive officers, should always consult with their companies’ general counsels prior to initiating sales.)

Why might this be the most practical approach? Because your compensation package will reload annually with fresh RSUs and PSUs that won’t fully vest for some time, your total future compensation – and exposure to company stock – may continue to rise. Although collecting an abundance of unvested stock can be a welcome planning challenge, the added equity can easily start to tilt your portfolio allocation if it vests and remains unsold. 

Selling your newly vested RSUs and PSUs may be the best way to diversify your investment portfolio and reduce risk. If you’re a senior executive, remember that your employment and compensation are also inexorably tied to your company, so it’s a good idea to use the vesting season to dial down your own personal financial exposure.

3. What if you don’t want to sell all your vested shares immediately?

If you’re hesitant to sell all of your newly vested RSUs and PSUs straightaway, or if you don’t want to sell at the current share price, you have several planning options.

For executives of public companies, the most powerful financial tool at your disposal may be a 10b5-1 plan, a trading contract that allows corporate leaders to buy and sell company stock on a predetermined schedule. If, for example, the stock drops from $70 per share to $50 per share shortly prior to the payment of your annual bonus – and you believe the stock is temporarily undervalued – you could set up a 10b5-1 plan to sell your vesting shares gradually, at different price points, as long as those dates and prices are set in advance.

If you’re not inclined to set up a 10b5-1 plan, you can always revisit the possibility of a sale at the next quarterly trading window. The window for senior executives typically begins two to three trading days after the previous quarter’s earnings release, and ends approximately two to three weeks prior to the end of the next fiscal quarter, resulting in a permitted trading period of about six weeks.

Individuals who are not considered insiders or subject to hedging and pledging restrictions at public companies may have access to various different hedging and monetization strategies.

4. If you don’t want to sell, what estate planning or charitable gifting options should you consider?

This year, we would encourage you to take advantage of the generous gift and estate tax exemptions currently available under the Tax Cuts and Jobs Act (TCJA) of 2017, which sunsets on December 31, 2025. Under the TCJA, federal estate, gift and generation-skipping transfer (GST) tax exemptions are nearly double their historical levels. Individual donors may make lifetime transfers of up to $13.99 million (adjusted for inflation); couples may make lifetime transfers up to $27.98 million without incurring federal estate or gift taxes.

The U.S. Congress may decide to extend some or all of the provisions of the TCJA that are scheduled to sunset at the end of 2025. No one yet knows the outcome of that debate. For now, you can still make significant transfers of newly vested stock to your spouse (and potentially your children, too), through different types of tailored, tax-efficient trusts. The most popular are: 

• SLATs: A spousal lifetime access trust, or SLAT, allows you to set up and fund an irrevocable trust for your partner’s benefit. The beneficiary spouse then retains access to the trust assets, which can provide financial flexibility.
• GRATs: Alternatively, you could consider gifting some of your newly vested stock to your children by setting up a grantor retained annuity trust, or GRAT. These cost-efficient estate planning tools permit you to minimize taxes on large financial gifts to family members. Using our previous example of depreciated stock, if your $50 per share RSUs and PSUs regained their previous value of $70 per share, your GRAT beneficiaries would profit from the $20 per share price appreciation. Any increase in value – beyond the applicable federal tax rate applied to the return on the trust’s assets¹ – would pass to your beneficiaries free of gift tax, and those gains would likely be taxed at a lower level.
• DAFs: Separately, if you’re interested in creating a philanthropic legacy, you might also want to consider whether to gift some of your older shares with a lower cost basis to charity (newly vested shares typically have a higher cost basis). Setting up a donor-advised fund (DAF) may be one idea worth exploring: DAFs offer a strategic way to pre-fund years of giving, providing an immediate annual tax deduction while giving you time to select the organizations you want to support.

5. Would taking a combined approach work?

For some executives, combining these approaches may yield the most tax-efficient outcome. You could choose, for example, to retain your newly vested shares and gift your shares with a lower cost basis as a way to contain – and limit – equity concentration in your portfolio (and minimize any potential capital gains tax). It’s also possible to gift shares with a low- or no-cost basis to charity via your DAF, and thus realize a charitable gift income tax exclusion.

For executives who want to transfer wealth to their beneficiaries in 2025, consider gifting your shares with a lower cost basis to children or grandchildren. Young beneficiaries may be able to sell some of the shares at a lower capital gains rate, or retain their new shares and accumulate dividends at a lower tax rate.

Conclusion: Make strategic decisions now to optimize your future wealth

As the new year unfolds, it’s crucial to take a proactive approach to managing your annual compensation package and benefit plan. Now is the time to review your current investment elections because the decisions you make can have a lasting impact on your financial future, influencing everything from portfolio diversification to tax efficiency.

By carefully evaluating your options as your RSUs and PSUs vest this year – whether to sell, hold or use a combination of planning strategies – you can align your actions with your financial objectives. Remember, the key is to stay flexible and informed as market conditions evolve, ensuring that your financial strategies remain aligned with your long-term wealth goals.

We can help

At J.P. Morgan, our team of specialists is here to provide personalized guidance tailored to your specific needs and circumstances. Whether you’re considering selling your newly vested shares, exploring tax-efficient gifting strategies or seeking to optimize your overall wealth plan, we have the tools and expertise to support you.

Speak with your J.P. Morgan advisor today to explore how we can help you make the most of your equity compensation and achieve your long-term financial goals.