After learning a lot of things about equity “the hard way,” then going down a rabbit hole learning everything I could about it and estate planning with my good friend Brent; I’m a firm believer in sharing knowledge about equity, personal finance, insurance and general estate planning.

This is a quick brain dump, will keep updating and refining!

DISCLAIMER: This is not financial advice, always do your own research!

Stocks/Options

• NSO
  • Non-qualified stock option (option to buy share)
  • Tax due on exercise (tip: exercise when FMV/Strike are the same to avoid tax liability)
• ISO
  • Incentive stock option (option to buy share)
  • Tax not due on exercise but applicable to AMT and end of year taxes
• RSU
  • Restricted stock unit (share)
  • Tax may, or may not, be withheld on vest
  • Employee “owns” share on vest
  • Applicable to income for tax purposes
• RSA
  • Restricted stock award (share w/ purchase requirement)
  • May have restricted rights
• RSU vs. RSA reference
  • Carta - RSA vs. RSU
• Profits interest
  • Equity right based on future value of a partnership
  • Provides a percentage of profits
  • Normally no capital requirements
• Early exercising
  • Exercise options before they are vested
  • This is important, the equity DOES NOT need to be vested before you can exercise
  • This also starts the clock applicable for long term capital gains
  • tip: always file an 83b election
• QSBS
  • Qualified Small business stock
  • Qualified c corporation with < $50M in gross assets
  • Hold stock for a minimum of 5 years (NOTE: these must be shares not options, aka exercise your options)
  • Tax free up to $10 million per taxable entity (more on this)
• 83b election
  • Required filing for QSBS and any early exercising to start the long-term capital gains timer
  • Must be filed within 30 days of the grant (rsu vest) or purchase (aka exercising option) of the stock
  • Send stamped envelope and copy of form
  • Request a stamped copy mailed back
  • Carta helps handle this for you now

Insurance

• Life Insurance
  • Term
    • Death benefit with no cash value
    • Lower premiums
  • Cash
    • Death benefit and accruing cash value
    • Higher premiums but has value
    • Some offer interesting benefits like 0% “loans” allowing you to take income but not qualify as an annuity
• Insurance
  • Umbrella
    • Get an umbrella policy for “insurance”
    • Cheap and cover any overages from traditional coverage limits
  • Home and auto insurance
    • Look for total replacement cost

Estate plan

• Estate tax/gifting
  • Annual distributions to heirs do note count against your estate tax exempt limit ($12.06M in 2022)
  • E.g. you can gift $16k per year (single) or $32k per year (couple) per person using the annual gift exclusion to ensure you get the full estate exclusion later in life
  • Pay federal tax on proceeds above exemption
  • TX does not levy an estate tax (w00t!)
• Trusts
  • Purpose
    • Probate avoidance
    • Asset delegation to minors
    • Make the trust the beneficiary on items to avoid probate
  • Revocable trust
    • Trust that can be amended/modified/revoked
  • Irrevocable trust
    • Trust that cannot be revoked
    • Can be used to provide “shielding”
  • Tons of others (dynasty, generation skipping, charitable)
• Will
  • Catch all to cover items not in trust
• Advanced health care directive
  • What to do if you become terminally or irreversibly ill
  • Aka pull the plug or not
• Financial power of attorney
  • Giving spouse or trust “power of attorney” for personally held accounts
• LLCs
  • Disregarded entity (“pass through” -> doesn’t file separate tax return, still files forms with SOS)
  • Partnership (some reporting requirements)
  • Corporation (tax return for all entities)
  • Key items
    • Create tax ids for each entity
    • Each entity should have separate bank accounts (don’t use your own)
  • Uses
    • Asset protection
    • Holding entity
    • Estate planning
• Asset protection
  • A mechanism to protect assets in case you are sued
  • Traditionally you would create an LLC for asset protection and transfer assets to that LLC
  • Can transfer assets between personal and asset protection LLCs
  • Cannot transfer assets after an incident has occurred (e.g., can’t hit someone, then transfer everything to LLC then protect)
• College/School savings plan
  • 529 plans
    • $16k a year per kid per adult
    • Superfunding
      • “pre pay” 5 years worth
      • Up to $80k/kid/adult or $160k per kid ($80k per guardian)
      • Cannot fund for the next 5 years
    • Uses
      • Any school expense (private school, university, etc.)

My setup

This is the estate plan I have in place for my family. It will obviously evolve over time, but should be a decent example of what implementing these things may look like.

• Trusts
  • Living trust for wife and I
  • Irrevocable trusts for kids
    • Allows me to transfer assets to them
    • Also, allows them to take advantage of the QSBS shares (e.g., they would each have their own $10 million exclusion since they are their own taxable entity)
• LLCs
  • 1 for real estate
  • 1 for asset protection
  • FUTURE - parent holding company
• Insurance
  • Nationwide private client
  • $10m umbrella
  • Named item insurance for valuable items (better than a blank generic)
• Life insurance
  • Term via company
  • Cash via lincoln financial for myself (will add one for wife later)
• Real estate
  • Homestead kept in name of trust (LLCs don’t apply for homestead exemption in Texas)
  • Rental properties in property LLC