Your equity compensation is governed first by your company’s plan documents, not by your will or trust. Most plans stop vesting at death, give your estate a limited window to exercise vested options, and settle vested but undelivered RSUs to your estate or beneficiary. The tax treatment is worse than people expect: unexercised options and unsettled RSUs are income in respect of a decedent, which means no step-up in basis on the built-in income. Shares you already own do get a step-up. The difference is large enough to change decisions.
Why Do the Plan Documents Control?
Because equity compensation is contractual. The grant agreement and the equity incentive plan define what happens at death, and your estate plan cannot override them.
This is the first thing to read, and almost nobody has. Pull your plan documents and find:
- Whether unvested awards accelerate at death. Many plans do not accelerate at all. Some accelerate fully, some partially, and some leave it to the board’s discretion.
- The post-death exercise window. This is the critical deadline. Some plans allow twelve months, some ninety days, and some only the remaining original term. Miss it and valuable options expire worthless.
- Whether beneficiary designations are permitted. Some plans allow one, which avoids probate for that award. Many do not, in which case the award passes through your estate.
- Transfer restrictions. Incentive stock options generally cannot be transferred during life. Non-qualified options sometimes can be, which opens gifting strategies.
The post-death exercise window causes the most loss. A grieving family that does not know a deadline exists discovers it after it passes.
What Is Income in Respect of a Decedent, and Why Does It Matter?
This is the tax concept that governs equity at death, and it undercuts an assumption most people hold.
Normally, assets you own at death get a step-up in basis to fair market value under Internal Revenue Code Section 1014. Your heirs can sell immediately with little or no capital gains tax. It is one of the most valuable features of the tax code.
Income in respect of a decedent, governed by Section 691, is the exception. IRD is income you earned but had not yet recognized when you died, and it does not receive a step-up on the income component. Your heirs pay ordinary income tax on it exactly as you would have.
Applied to equity compensation:
| What you hold at death | Treatment |
| Shares you already own | Step-up in basis, sell with little or no gain |
| Vested but unsettled RSUs | IRD, ordinary income when received |
| Unexercised non-qualified options | IRD on the spread, ordinary income at exercise |
| Unvested RSUs or options | Usually forfeited unless the plan accelerates |
There is partial relief. Under Section 691(c), your heirs may deduct the federal estate tax attributable to the IRD item against the income they recognize. It softens the double taxation without eliminating it, and it only helps if federal estate tax was actually paid.
How Are the Different Award Types Treated?
Non-qualified stock options. Your estate or beneficiary exercises and owes ordinary income tax on the spread between the exercise price and the fair market value at exercise. Withholding and payroll reporting still apply in most cases.
Incentive stock options. Treatment after death is more favorable in one important respect: the statutory holding period requirements that normally apply to ISO shares do not apply when the option is exercised by the estate or by a person acquiring it from the decedent. That can preserve capital gain treatment. Alternative minimum tax can still apply on exercise, particularly if the stock appreciates after death and the shares are not sold in the same tax year. This area is technical and the plan document’s deadlines still govern, so involve a CPA before exercising.
Restricted stock units. Vested but unsettled RSUs are IRD, taxed as ordinary income when delivered. Unvested RSUs typically forfeit unless the plan provides otherwise.
Restricted stock you already hold. These are shares you own, so they get the step-up.
Where Does the Cash Come From?
This is the practical problem families hit first.
Exercising options requires cash, sometimes a great deal of it, plus the income tax on the spread. Your family may be looking at a large exercise cost and a short deadline, for shares in a company they may not be able to sell quickly if it is private.
Steps worth taking now:
- Calculate the worst case. Total exercise cost plus estimated tax for all vested options, at a realistic valuation.
- Provide liquidity. Life insurance is the usual source, and for larger amounts an irrevocable life insurance trust keeps the proceeds out of your taxable estate.
- Check for a cashless exercise option. Public company plans often permit it. Private company plans usually do not, which is where the squeeze is worst.
- Leave written instructions. A short memo naming the plan administrator, the deadlines, and who to call is worth more than most of your estate plan in this situation.
How Does the Massachusetts Estate Tax Fit In?
Equity compensation counts toward your gross estate, and Massachusetts has a low threshold.
Massachusetts taxes estates over $2 million with rates reaching 16%, and once you cross that line the tax applies to the whole estate rather than only the excess. A technology or biotech employee in the Merrimack Valley with a house, retirement accounts, and a concentrated equity position can pass $2 million without feeling wealthy.
Two compounding problems: the estate tax is due roughly nine months after death, and equity in a private company may be impossible to sell in that window. Valuation is also contestable, and a large position valued at a peak creates a tax bill that does not fall when the stock does.
Federal estate tax is a smaller concern for most, at $15 million per person in 2026, and the IRS estate tax overview covers the mechanics.
What Planning Actually Helps?
- Read the plan documents and summarize the deadlines somewhere your family will find them.
- Coordinate beneficiary designations where the plan permits them, and make sure they match the rest of your plan.
- Consider gifting non-qualified options or shares early, before appreciation, so future growth happens outside your estate. ISOs cannot be transferred during life.
- Hold appreciated shares rather than gifting them, since the step-up at death eliminates the gain while a lifetime gift carries your basis over.
- Diversify concentrated positions during your lifetime where you can. A single-stock estate is a risk your family inherits.
- Name a trustee who understands equity. Exercising options under deadline pressure is not a task for someone learning the vocabulary that week.
Our trust planning team drafts for these assets specifically, including authority for the trustee to borrow or retain advisors to fund an exercise.
Frequently Asked Questions
Do my unvested RSUs go to my family?
Usually not. Most plans stop vesting at death unless the plan or grant agreement provides for acceleration.
How long does my family have to exercise my options?
Whatever the plan says, commonly ninety days to twelve months. Confirm the exact window now, because missing it forfeits the award.
Do my heirs get a step-up in basis on my stock options?
Not on the built-in income. Options and unsettled RSUs are income in respect of a decedent, so the spread stays taxable as ordinary income.
Can I put my stock options in a trust?
Non-qualified options sometimes, depending on the plan. Incentive stock options generally cannot be transferred during life without losing ISO status.
Find the Deadline Before Your Family Has To
Equity compensation is the part of an estate where the loss is most often total and most often avoidable. Options do not sit patiently waiting to be discovered. They expire on a schedule set by a document in a benefits portal that your family has never seen.
To coordinate your equity compensation with your estate plan and the Massachusetts estate tax, contact us to schedule a consultation. We work with professionals throughout Essex County and the Merrimack Valley, including Andover, North Andover, Wilmington, Reading, and North Reading.