Executive Summary
Are stock options and RSUs included in your estate for tax purposes?
Yes. All vested stock options and RSUs are included in your gross estate at fair market value on the date of death. For options, the value is the spread (FMV minus strike price) times the number of shares. Unvested equity may also be included if it's transferable or has a determinable value. The estate tax rate is 40% on amounts exceeding the exemption ($13.99M in 2025).
For tech employees with significant equity compensation, estate planning isn't optional—it's a critical wealth preservation strategy. Consider: a senior engineer at a pre-IPO company with 200,000 vested options at a $2 strike price. If the company goes public at $100/share, those options are worth $19.6 million. Without planning, the estate tax bill could exceed $3 million.
The bottom line: The tax code provides powerful tools to transfer equity wealth to the next generation, but most require action before the value appreciates. Once your startup goes public or your RSUs vest at a high stock price, the most effective planning windows have closed.1
Critical Warning: The current estate tax exemption ($13.99M per person / $27.98M per couple in 2025) is set to sunset after 2025, potentially dropping to approximately $7M per person. The window for large tax-free transfers is closing.
Estate Tax Fundamentals for Equity Holders
What's in Your Taxable Estate?
| Asset Type | Included in Estate? | Valuation Method |
|---|---|---|
| Vested stock options | Yes | Spread × shares (FMV − strike) |
| Unvested stock options | Depends on plan terms | Reduced by forfeiture risk |
| Vested RSUs (settled shares) | Yes | FMV × shares on date of death |
| Unvested RSUs | Generally yes | FMV × shares, discounted for forfeiture risk |
| ESPP shares | Yes | FMV on date of death |
| Exercised shares (held) | Yes | FMV on date of death |
2025–2026 Estate Tax Parameters
| Parameter | 2025 | 2026 (Projected Post-Sunset) |
|---|---|---|
| Exemption (individual) | $13,990,000 | ~$7,000,000 |
| Exemption (married couple) | $27,980,000 | ~$14,000,000 |
| Top tax rate | 40% | 40% |
| Annual gift exclusion | $19,000/recipient | ~$19,000/recipient |
| Lifetime gift exemption | Unified with estate | Unified with estate |
Source: IRS Revenue Procedure 2024-40
Gifting Stock Options
Can you gift stock options to family members?
NSOs (Non-Qualified Stock Options) can be gifted to family members, trusts, or other entities if the stock plan permits transfers. ISOs cannot be transferred during your lifetime—they must remain with the employee to maintain ISO status under IRC Section 422. When you gift NSOs, the recipient recognizes ordinary income at exercise, but you (the donor) remain liable for the gift tax on the transfer.
NSO Gifting: The Most Powerful Tool
Gifting NSOs before the company appreciates is one of the most effective estate planning strategies available:
| Timing | Gift Value | Future Value (at IPO) | Estate Tax Saved (40%) |
|---|---|---|---|
| Gift at grant (FMV = strike) | ~$0 | $2,000,000 | $800,000 |
| Gift at Series B | $200,000 | $2,000,000 | $720,000 |
| Gift at pre-IPO | $1,000,000 | $2,000,000 | $400,000 |
| No gift (held until death) | N/A | $2,000,000 | $0 (fully taxed) |
How it works:
- You gift unvested or vested NSOs to a family member or trust
- The gift is valued at the option's fair market value at the time of transfer (often minimal for early-stage companies)
- All future appreciation is removed from your estate
- The recipient pays ordinary income tax when they exercise
Gift Tax on Option Transfers
The gift value of a stock option is determined using option pricing models:
| Factor | Impact on Gift Value |
|---|---|
| Spread at transfer | Higher spread = higher gift value |
| Time to expiration | More time = higher value |
| Stock volatility | Higher volatility = higher value |
| Risk-free interest rate | Higher rate = higher value |
| Vesting restrictions | Unvested = discount for forfeiture risk |
Key insight: Gift options when the spread is zero or minimal (near the grant date) to minimize gift tax. The gift is valued at the option's current fair market value, not its potential future value.2
ISO Limitations
ISOs cannot be transferred during your lifetime except by will or intestate succession. This is a fundamental requirement of IRC Section 422(b)(5). If you transfer an ISO, it becomes an NSO.
| ISO Event | Estate Planning Impact |
|---|---|
| Death before exercise | ISOs pass to heirs; heirs have limited exercise window |
| Death after exercise, before sale | Shares included in estate at FMV; heirs get step-up in basis |
| ISO converted to NSO (for transfer) | Loses preferential tax treatment; becomes giftable |
Trust Strategies for Equity Compensation
Grantor Retained Annuity Trust (GRAT)
GRATs are the gold standard for transferring pre-IPO equity with minimal gift tax:
| Component | How It Works |
|---|---|
| Setup | Transfer options or shares to an irrevocable trust |
| Annuity payments | Trust pays you a fixed annuity for 2–10 years |
| Remainder | After annuity period, remaining assets pass to beneficiaries tax-free |
| Gift tax | Gift value = transferred assets minus present value of annuity (can be zeroed out) |
Why GRATs work for equity:
A "zeroed-out" GRAT transfers assets with no gift tax if the assets appreciate faster than the IRS assumed rate (Section 7520 rate). For pre-IPO equity that could 10×, this is extraordinarily effective.
Example: Pre-IPO GRAT
| Element | Value |
|---|---|
| Options transferred | 50,000 NSOs, strike $5, current FMV $10 |
| Initial value | $250,000 (spread × shares) |
| GRAT term | 2 years |
| Section 7520 rate | 5.0% |
| Annuity payments | ~$134,000/year |
| Taxable gift | $0 (zeroed-out GRAT) |
| Value at IPO (18 months later, $80/share) | $3,750,000 |
| Remainder to children | ~$3,482,000 |
| Estate tax saved | ~$1,393,000 |
Intentionally Defective Grantor Trust (IDGT)
For even larger equity positions, an IDGT combined with an installment sale provides additional benefits:
| Feature | GRAT | IDGT + Installment Sale |
|---|---|---|
| Gift tax | None (if zeroed-out) | Requires seed gift (~10% of sale) |
| Income tax on trust assets | Grantor pays (benefit) | Grantor pays (benefit) |
| Mortality risk | Assets revert if grantor dies during term | No reversion risk |
| Flexibility | Fixed annuity schedule | More flexible distributions |
| Best for | Single liquidity event (IPO) | Ongoing appreciation |
Irrevocable Life Insurance Trust (ILIT)
For employees whose equity will create a large estate tax bill, an ILIT can provide liquidity:
| Purpose | Using equity proceeds to fund life insurance that pays estate taxes |
|---|---|
| How | Gift cash to ILIT → ILIT purchases life insurance → Death benefit pays estate taxes |
| Benefit | Insurance proceeds are outside your estate |
| Funding | Use annual gift exclusion ($19,000/beneficiary) or part of lifetime exemption |
| Best for | Illiquid estates (private company shares that can't be sold to pay taxes) |
What Happens When You Die: Equity Inheritance Rules
Step-Up in Basis (for Shares)
Shares you own at death receive a step-up in basis to their fair market value on the date of death. This eliminates all capital gains tax on appreciation during your lifetime:
| Scenario | Your Basis | FMV at Death | Heir's Basis | Capital Gains Tax Eliminated |
|---|---|---|---|---|
| Exercised options, held shares | $10/share | $150/share | $150/share | 100% of $140/share gain |
| ESPP shares | $8/share (discounted) | $150/share | $150/share | 100% of $142/share gain |
| Purchased shares | $50/share | $150/share | $150/share | 100% of $100/share gain |
Planning insight: For highly appreciated shares, holding until death can be more tax-efficient than selling during your lifetime, since the step-up eliminates all capital gains tax.
Income in Respect of a Decedent (IRD)
Unvested RSUs and unexercised stock options do NOT receive a step-up in basis. They are classified as "Income in Respect of a Decedent" (IRD) under IRC Section 691:3
| Equity Type | Step-Up Available? | Tax Treatment for Heirs |
|---|---|---|
| Exercised shares held at death | ✅ Yes | Step-up to FMV; no CG on prior appreciation |
| Vested, unexercised options | ❌ No (IRD) | Ordinary income tax on spread at exercise |
| Unvested RSUs | ❌ No (IRD) | Ordinary income tax at vesting |
| Unvested options | ❌ No (IRD) | Ordinary income tax at exercise (if exercisable) |
The double tax problem: IRD assets can be subject to both estate tax (in the decedent's estate) and income tax (when the heir exercises or receives the shares). However, heirs can deduct the estate tax attributable to the IRD item, partially mitigating the double taxation.4
Charitable Strategies
For employees who want to reduce their estate while supporting causes they care about, charitable strategies with equity are powerful. See also our guide to donating equity shares.
Charitable Remainder Trust (CRT)
| Feature | Benefit |
|---|---|
| Tax-deferred diversification | Sell concentrated stock inside CRT without immediate capital gains |
| Income stream | Receive annual payments (5–50% of trust value) for life or a term |
| Charitable deduction | Immediate income tax deduction for present value of remainder |
| Estate reduction | Assets in CRT are removed from taxable estate |
Example:
| Element | Value |
|---|---|
| Shares contributed | 10,000 shares at $100 (basis: $5) |
| Value | $1,000,000 |
| CRT sells shares | No capital gains tax on $950,000 gain |
| Annual payout (7%) | $70,000/year |
| Charitable deduction | ~$350,000 |
| Estate tax saved | $400,000 (at 40% rate) |
Donor-Advised Fund (DAF)
| Advantage | Details |
|---|---|
| Immediate deduction | Deduct FMV of donated shares (up to 30% of AGI) |
| No capital gains | Avoid tax on appreciation |
| Timing flexibility | Donate now, recommend grants to charities later |
| Simplicity | Easier to set up than a CRT or private foundation |
Action Plan: Estate Planning Timeline for Tech Employees
Pre-IPO / Early Stage
| Priority | Action |
|---|---|
| High | Gift NSOs to family members or trusts while value is minimal |
| High | Establish a GRAT funded with pre-IPO options |
| Medium | Consider early exercise + 83(b) election (starts CG clock, low gift value) |
| Medium | Review stock plan for transfer provisions |
Post-IPO / Liquid Equity
| Priority | Action |
|---|---|
| High | Use annual gift exclusion ($19,000/recipient) to gift shares |
| High | Fund a CRT or DAF with highly appreciated shares |
| Medium | Establish an ILIT if estate exceeds exemption |
| Medium | Consider IDGT for ongoing equity appreciation |
| Low | Review beneficiary designations on all equity accounts |
Annually
| Action | Timing |
|---|---|
| Review estate plan with attorney | Q1 each year |
| Update equity inventory (all grants, vesting, values) | After each new grant |
| Make annual exclusion gifts | Before December 31 |
| Review and update beneficiary designations | After major life events |
| Year-end tax planning | October–December |
Frequently Asked Questions
What happens to my unvested RSUs when I die?
Most RSU plans either accelerate vesting on death (all unvested shares vest immediately) or forfeit unvested shares. Check your plan documents. If vesting accelerates, the shares vest and are delivered to your estate or designated beneficiary. The income is taxed as IRD—your estate or heir pays ordinary income tax on the value.
Source: IRC Section 691
Can I name a beneficiary for my stock options?
Yes, most stock option plans allow you to designate a beneficiary. If you don't, the options pass through your estate under your will or state intestacy laws. Always designate a beneficiary—it avoids probate delays and ensures the options don't expire while the estate is being settled.
Is there a step-up in basis for inherited stock options?
No. Unexercised stock options are classified as Income in Respect of a Decedent (IRD). The heir who exercises them pays ordinary income tax on the spread, just as the decedent would have. However, exercised shares that are held until death do receive a step-up in basis.
How long do heirs have to exercise inherited options?
This depends on the stock plan, but most plans give heirs 12 months from the date of death to exercise. Some plans are more restrictive (6 months) or generous (until the original expiration date). Check the plan documents and act quickly.
Should I exercise my options before I die?
If you have highly appreciated ISOs, exercising and holding the shares ensures your heirs receive a step-up in basis on the shares (eliminating capital gains). However, exercise triggers income tax (and potentially AMT). Compare the exercise tax cost against the estate/capital gains tax savings for your heirs.
Does community property affect estate planning with equity?
Yes. In community property states, the surviving spouse's half of community property also receives a step-up in basis (the "double step-up"). This makes it particularly advantageous to hold appreciated shares as community property in those states.
Source: IRC Section 1014(b)(6)
Footnotes
Disclaimer: This guide discusses legal estate planning strategies only. Tax evasion is illegal and is never recommended. This content is for educational purposes and does not constitute tax, legal, or financial advice. Estate and tax laws vary by jurisdiction and change frequently. Always consult a qualified estate planning attorney and tax professional before making decisions based on this information. The authors accept no liability for actions taken based on this content.
Primary Sources
| Source | Type | URL |
|---|---|---|
| IRC Section 2031 | Statute | law.cornell.edu/uscode/text/26/2031 |
| IRC Section 2503 | Statute | law.cornell.edu/uscode/text/26/2503 |
| IRC Section 691 | Statute | law.cornell.edu/uscode/text/26/691 |
| IRC Section 1014 | Statute | law.cornell.edu/uscode/text/26/1014 |
| IRS Publication 559 | Official Guidance | irs.gov/publications/p559 |
| Rev. Proc. 98-34 | IRS Guidance | irs.gov |
| IRS Estate Tax FAQ | Official Guidance | irs.gov/businesses/small-businesses-self-employed/estate-tax |
Last Updated: March 2026 | Research Team: VestingStrategy
Footnotes
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The IRS values gifted options using recognized option pricing models (Black-Scholes, binomial). Rev. Proc. 98-34 provides guidance on valuing compensatory stock options for gift and estate tax purposes. ↩
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The gift tax annual exclusion ($19,000 per recipient in 2025) can be used for option gifts, but the option must have a determinable value and the gift must be a completed transfer. ↩
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IRC Section 691 defines Income in Respect of a Decedent as income that the decedent had a right to receive but that was not properly includable in income before death. ↩
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IRC Section 691(c) allows heirs to deduct the federal estate tax attributable to IRD items, partially offsetting the double taxation effect. ↩