The Advisors' Blog

I am Ed Burmeister, a partner in the Global Equity Services practice at Baker & McKenzie, LLP, based in San Francisco and this is my first blog. Maybe it’s my advancing age or my reaction to Michael Album’s recent blog, but I have also been musing about death and equity plans. As an aside, recently departed George Carlin, one of my favorites, had a great quote on death, impermanence and humor.

Overuse in Equity Plans

Anyway, one of my pet peeves is the over use of beneficiary designations in equity plans. There are a few valid reasons to consider beneficiary designations, primarily for executives, in long-term incentive plans. Even in these situations, care must be exercised, as most beneficiary form administration is not very good, to be blunt. For example, how many plan administrators know in which states a divorce invalidates a previous beneficiary designation, or whether and how community property laws come into play.

Overseas, of course, these are often not fully enforceable due to overriding local rules dealing with rights of spouses and children and procedural requirements which typical U.S. forms and procedures would not meet. Let me just say that an interpleader action is not a very attractive alternative if an optionee dies with a questionable beneficiary designation on file. Just depositing the option into the court is a challenge in and of itself, and, of course, you are normally dealing with a one year period at most to resolve the situation.

Particular Problems with ESPPs

But leaving aside long-term incentive plans, my real pet peeve is the use of these in employee stock purchase plans. Worse, some of these plans purport to apply beneficiary designations to shares in the so-called “plan account”. The problem here is that once the shares are in the brokerage account, the broker will normally permit title designations, such as joint-tenancy or community property. Moreover, the broker will likely be unaware of the plan provision applying a beneficiary designation to the shares in the account and of course would not typically have a copy of the beneficiary designation.

I frankly fail to understand why a company would want to be dealing with the shares in the brokerage account after the death of an ESPP participant. Whatever estate planning or other dealings the employee may wish to have with respect to the shares, he or she is certainly free to do so by dealing directly with the broker.

As to the cash accumulated in the account pre-purchase, almost all plans say that the cash is returned to the estate or beneficiary. Because a deceased ESPP participant will almost certainly have been an active employee at death, the employer will normally owe the employee some amount of money in any event (unpaid wages, bonuses, etc.) so why not just include the cash accumulated from ESPP payroll deductions and distribute that the same way company would distribute unpaid wages, i.e., to the personal representative of the estate of that participant.

Since every state and essentially every country has someone designated as a personal representative of the estate, in almost all cases it will be much easier for a plan administrator to deal with that individual and not worry about whether or not the designated beneficiary form on file is fully effective. Also, this approach always avoids an interpleader if the plan provision is clearly written to provide that the benefits go to the estate of the participant. So… for my two cents, I would avoid beneficiary forms in ESPPs altogether and be quite cautious in how these are used in long-term incentive plans, particularly with respect to overseas employees.

U.S. Estate Tax Issues

One more thing, stock of a U.S. corporation or an option over shares of a U.S. corporation will potentially subject the estate of the holder of the option/shares to U.S. estate tax even if the holder of the option/shares is not a U.S. citizen or resident and has never even been to the U.S. Also, the exemption for marital transfers and other U.S. estate tax exemptions (e.g., the lifetime exclusion) do not apply in most cases to the overseas situation. In this case, the plan/broker needs to deal with the U.S. estate tax issues, and these can be typically handled much more effectively with the personal representative of the estate rather than a beneficiary, who might even be a minor in some cases.

Enough of death…time to return to the world of the living…

– Ed Burmeister, Baker & McKenzie