Advisers can Help With Restricted Stock Units

Employees with RSUs have a valuable asset. Financial advisers can help with taxes and management.
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Restricted stock units, or RSUs, have gained in popularity in recent years as a way to provide stock-based compensation to certain employees. Those who have RSUs have something of value, they will need a financial adviser’s guidance and advice in managing their RSUs to maximize their value.

RSUs vs. Stock Options

Stock options have for years been a common form of stock-based compensation. A stock option grants the option holder the right, but not the obligation, to buy a set number of shares of the company’s stock within a specified period of time. If the shares trade below the option’s strike price, they may expire worthless.

RSUs are a grant based on the underlying value of the company’s stock. They are issued to employees with a vesting schedule that is based upon achieving a level of tenure with the employer or upon the employee achieving certain goals set forth by the company. RSUs can be issued by both publicly traded companies and by privately held organizations.

RSUs gained in popularity after the Financial Accounting Standards Board (FASB) changed the accounting rules in 2004 for stock options due to abuses by some companies and their executives.

Features of RSUs

RSUs have several features that recipients need to be aware of.

Unlike stock options, RSUs will always have some value since the grant is for shares versus an option to buy the shares at a specified price.

The value of the shares is taxable to the employee when they are vested, and they receive the shares. This value is taxed as ordinary income in that year. Many companies will withhold a portion of the value of the shares for taxes. If the shares are then held for at least a year and sold for a gain, the gains will be taxed at preferential capital gains rates.

For clients who have RSUs, you will want to understand:

  • What is the vesting period? Is it based on the passage of time, or the achievement of some company or employee goal?
  • What happens to the RSUs if they leave the company prior to the vesting date? If they should die prior to that date?
  • What happens to the RSUs if there is a change in control of the company prior to the vesting date?

Planning Opportunities

RSUs are a way for companies to compensate employees beyond cash compensation such as salaries and bonuses. For companies whose stock has growth potential, RSUs can be a great incentive for these employees to stay with the company.

Here are some factors to consider when advising clients on how to handle their RSUs.

Do the added shares from the RSUs create a concentrated position of the company’s stock in your client’s portfolio? It can be hard to sell shares of a promising stock, but as their adviser you know the risks of being overly concentrated in the shares of any company. You might consider using a stop order or similar type of order to help mitigate downside risk.

Does the client have a large expense coming up that the shares can be used to cover all or in part? This might be a down payment on a new home or college tuition for one of their children.

If the vesting of the RSUs will represent a significant tax hit for your client and they are charitably inclined, they might consider donating some of the shares directly to a charity or funding a donor advised fund with some of the shares. If the client can itemize they will receive a deduction for the value of the shares donated.

If the shares appear to have decent upside potential, it can make sense to hold them for at least a year in order to have the gains taxed at preferential capital gains rates. On the other hand, if your client is concerned about the company’s future prospects it might make sense to sell some or all of the shares. The value of the shares at the vesting date will be taxed regardless so there may not be any significant tax consequences here. An RSU can be thought of as a cash bonus given the way they are taxed upon vesting.

Restricted stock units can be a valuable addition to your client’s compensation package. Proper planning can help them make the most of this benefit.