If you work in technology, finance, or at a growing company, chances are you’ve been granted restricted stock units (RSUs) as part of your compensation. RSUs can be an important part of your wealth, but they also bring unique estate planning challenges, especially when they are granted but not yet vested.
What is an RSU?
A restricted stock unit (RSU) is a promise from your employer to give you company stock in the future. Unlike stock options or outright shares, RSUs come with restrictions:
- You don’t own them yet: RSUs only become yours once they “vest.” Vesting usually happens over time or when you meet certain performance goals.
- You can’t transfer them: Until they vest, RSUs generally cannot be sold, gifted, or put into a trust.
- They are taxed later: You don’t pay tax when you are granted RSUs. Instead, you pay ordinary income tax when they vest, based on the stock’s value at that time.
- They can be forfeited: If you leave your job before the RSUs vest, you usually lose them.
Because of these rules, estate planning for RSUs has to be handled differently than with other assets.
Estate Planning Strategies During Your Lifetime
Even though you can’t transfer unvested RSUs right now, you can plan ahead. Here are some strategies:
Use a Revocable Living Trust
Once your RSUs vest and turn into actual stock, you can make sure those shares flow into your revocable living trust. This avoids probate and ensures the stock passes according to your estate plan.
Review Beneficiary Designations
Some RSU plans let you name a beneficiary. Others automatically accelerate vesting if you die or become disabled. Reviewing your plan documents is critical to know which applies to you.
Be Ready for Post-Vesting Planning
After RSUs vest, you have more options. At that point, you can:
- Transfer shares into an irrevocable trust (such as a Spousal Lifetime Access Trust or Intentionally Defective Grantor Trust) to reduce estate taxes.
- Make charitable gifts, either directly or through a Donor-Advised Fund or Charitable Remainder Trust.
- Use family partnerships in conjunction with irrevocable trusts to keep control while planning for future generations.
Tax Elections (Rare but Possible)
In certain startup or private company situations, an 83(i) election may let you defer taxes after vesting. This is uncommon, but if your employer offers it, it can impact your planning.
What Happens to RSUs When You Die?
This is one of the most important estate planning questions for RSUs. The answer depends on your employer’s rules:
- Accelerated Vesting: Many plans say RSUs automatically vest if you pass away. In this case, your estate receives the shares, and they are subject to both income tax and estate tax.
- No Acceleration: Some plans simply cancel unvested RSUs when the employee dies. If this happens, the RSUs never become part of your estate.
Because the outcome depends on your specific plan, it’s crucial to review your equity compensation documents as part of your estate plan.
Advanced Estate Planning for RSUs
If RSUs make up a large part of your wealth, you may want to go further with your planning:
- Trusts for heirs or minors: Ensure vested shares can be held in trust for children or other beneficiaries, protecting the stock from lawsuits, creditors, or mismanagement.
- Liquidity planning: Remember, vested RSUs trigger income tax. If you die and your RSUs vest all at once, your estate may face both income and estate taxes. Life insurance owned by an Irrevocable Life Insurance Trust that you establish or other liquid assets can provide the cash to cover taxes without forcing a sale at the wrong time. Having to deal with a fire sale of assets is never an attractive option.
- Team approach: Because RSU planning involves tax law, company plan rules, and estate planning strategies, it’s best to coordinate with both your tax advisor and your estate planning attorney.
RSUs are a powerful wealth-building tool, but they don’t fit neatly into traditional estate planning. If you’ve been granted RSUs, even if they’re not yet vested, it’s important to understand how they work and what will happen to them when you die based on your employer’s plan documents.
By preparing now, you can ensure your RSUs support your family’s future, minimize taxes, and avoid unnecessary complications.
If you’re in California and hold RSUs as part of your compensation, our office can help you design an estate plan that can help you protect what you have worked so hard for.
If you, a friend, or family member need help establishing or restating an estate plan, please reach out to our Intake Department at 760-448-2220 or submit an inquiry on our "Contact Us" page. We have offices in San Diego County (Carlsbad) and Orange County (Laguna Niguel), but we can assist clients throughout California as well.
