A executive is often up against the problem of finding the money to exercise his stock choices. There are several alternatives available to him.
O He could arrange for financing from the company or by present retirement or profitsharing funds.
O When the choice is exercisable within an extended period of time, they can exercise part of the possibility and use this stock to cover the newest stock as each installation is exercised, without gain on the stock used in payment.
No matter how he frees his loan, of course, he will need to pay for the money backagain. If he has bought in an increasing market, however, that may be fairly painless. They can sell a number of the stock, reimburse the bank loan, and still have his profit.
Commodity and Estate Taxes
When an executive dies before he’s exercised his stock options, what happens afterward?
Sometimes the options aren’t exercisable and consequently lapse. Or even the estate could be allowed to exercise them. If so, they are considered part of his taxable estate. His estate is going to have to pay an estate tax upon the price of the options, i.e., to the difference between the option price and the selling price during that time of his passing.
This property tax liability, incidentally, occurs whether the property actually exercises the option. Hence a real estate taxation can be assessed though the estate will not get any profit. This typically means that the estate is going to require to exercise the rest of the options. However, the money to do so could be difficult to get as a result of the perimeter limits on stock-purchase borrowing. Key executives therefore would be well advised to supply sufficient life insurance proceeds to produce ready cash designed for this purpose, specially if their investment are large.