Wealth Client Case Study
Adam & Lauren
Marital Status: Married
State of Residence: North Carolina
Household Income: $600,000
Clients: Adam (42) is a Chief Product Officer for a VC-backed company & Lauren (38) is an Executive Director at a non-profit organization.
Background:
Adam joined his first VC-backed startup in 2019 and was recently promoted to Chief Product Officer. He holds a combination of Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). He has never exercised stock options before due to the unknown tax consequences and the significant capital outlay required to buy his shares. In light of his recent promotion, he has excess income that he would like to direct to start exercising some of his options.
Lauren has spent her career in the non-profit sector, currently leading an organization that provides rehabilitation services to reduce reincarceration. She’s passionate about the work she does and serves on the Board of Directors for multiple organizations as well.
In addition to owning their primary residence, they have an investment property they rent on AirBnB and are seeking guidance on tax planning strategies for this property. They have both been working non-stop since they graduated college and would love to have the financial flexibility where they could both take time away from work to recharge and spend time with their children while they are all still at home.
They currently have three children and are planning to adopt their fourth child next year. When they are not working, they love taking trips as a family, they volunteer & support local non-profit organizations, and the family is very active within their church.
Advisor Recommendations,
Actions Taken:
- Managing a concentrated stock position - As a result of a tender offer, Adam was able to sell 15% of his vested equity. We implemented a tax-managed account to create a diversified investment portfolio that complements his company stock exposure. We emphasized companies with higher profitability and lower valuations to manage the risks he is exposed to with his private company stock.
- Backdoor Roth IRA Contributions - Since their household income is above the IRS threshold to contribute directly to a Roth IRA, we discussed the “Backdoor” method to begin building up a tax-free retirement account. We transferred Lauren’s former employer’s 403(b) into her current 403(b), so that she would not have any pre-tax IRA money that would be subject to the pro-rata rule.
- Established Multiple Savings “Buckets” for Upcoming Financial Goals - They desire to build an ADU for their growing family, Adam needs to replace his vehicle within the next 2 years, and they want easy access to cash as needed throughout the adoption process
- Built a multi-year exercise plan for Adam’s Stock Options - Due to the $100k annual limit for vesting ISOs, a significant portion of Adam’s stock options are NSOs. I explained the differences between the two forms of stock options and recommended he prioritize exercising his ISOs due to the favorable tax treatment & lower risk exposure. I created a multi-year exercise plan to target exercising 50% of his total ISO grants over the next three years. In addition, his company has mentioned running a company-sponsored secondary sale in the future, so I suggested that a “cashless exercise & sale” could be an attractive route to consider for his vested NSOs.