Stock option planning for technology professionals is best done using integrated financial planning instead of looking solely at either taxes or investment strategies. When someone suddenly cashes in an enormous option that means they may now need advanced estate planning using irrevocable trusts, ILIT’s, FLP’s. They need to plan for a reversal of fortune where their newly acquired shares (after they exercised the option) may carry a huge risk of sudden irreversible loss of wealth. The client needs to plan for income tax, AMT, proper diversification without giving up too much of his beloved stock, and retirement cash flow planning.

Working in Silicon Valley in finance since 1987 has taught me a lot about stock option planning for technology professionals. Also, many clients told me their stories or coworker’s stories about striking the big time with employee stock options only to lose most of it in a few years and then get stuck with only a base salary that is not really adequate for Silicon Valley. My experience working with Silicon Valley clients allowed me to see lots of prominent tech companies that had unique, attractive products that becoame commoditized and then their profit margins and stock price collapsed. Stock option planning for technology professionals needs to be properly handled as it is crucial to financial planning.

Stock option planning needs to focus on investment forecasts more than on tax planning, because if a bubbly stock suddenly crashes the loss to the option contract owner may be far more than the tax cost if the options were exercised at the top of the bubble.

Stock option planning is a challenge because of conflicting strategies about AMT, stock bubbles, tax bubbles, and guesstimates about future tax laws and future employment outcomes.

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Donald Martin is a NAPFA-Registered Fee-Only financial planner and investment advisor.