Holding US stocks and estate planning considerations

According to the American Chamber of Commerce Ireland, there are over 160,000 Irish people directly employed by roughly 700 US multinationals in Ireland. Share based compensation is a common way for these employers to provide additional rewards to attract and retain talent.   This often results in employees holding significant US shares in their investment portfolios. This has two major risks:

  • Estate planning risk
  • Single stock risk

Estate Planning

One point to watch with US investments/shares is that US estate tax can cause an issue. US estate tax arises on US situs assets if individuals are not domiciled in the US. This means that only the first  USD60,000 of US situs assets such as shares are tax free for a non-US person. Any balance above USD60,000 is taxable at 40%.  This may need to be insured if the individual intends to hold on to the stock long term.  In addition, if the assets are transferring to a non spouse on death a credit may be available for US estate tax paid (against Irish estate tax)

Single stock risk

For many employees who work for listed companies, a considerable portion of their net worth is tied to the value of the shares held in their employer. However, it is very important to differentiate between building wealth and maintaining wealth. The use of share-based compensation generally benefits both employee and employer and is a prudent and often tax efficient method of rewarding employees.

However, holding a concentrated portion of your wealth in a single stock over a long period of time is fraught with risk. There is a temptation to think, “I can see first-hand how the company is performing. It is doing very well right now so it makes sense to hold on to my company shares”.

However, there are a number of issues with that line of thinking;

  • We are at risk of cognitive dissonance which means once we have made our decision, we unconsciously cherry pick only evidence to support our decision while discounting any evidence to the contrary. No matter how educated and informed we are, we are all susceptible to cognitive dissonance in our lives.
  • While the company may be performing well right now, the creative, destructive nature of the capitalist system means that new competitors and new technologies are a constant threat to the company. Take for example General Electric (GE) the largest company in the world at one time has seen its share price drop 80% in just two years, between November 2016 and November 2018. It is incredibly difficult to predict the fortunes (both good or bad) of any one company.
  • Even if the company performs well, there is no guarantee that the stock price will match the performance. If we look back 50 years ago to the early 1970s, we can see that the fashionable stocks at that time were companies like McDonalds and Coca Cola. (similar to how people perceive tech companies today). These seemed to be great stocks to buy irrespective of the current price – they were always destined to increase their stock price. This all came to a shuddering halt after 1972. A person who had bought into Coca Cola 1972 would not have seen a return for over a decade. They would have also had to falls in the stock of 50% (from March 1973 to March 1975).

The bottom line is that you are taking far more risk than you should. If you continue to retain the shares after they vest you are taking on significant single stock risk. This is compounded by the fact that you are already invested in the company by being employed by them – if anything happens you don’t want to be “all in” – think Anglo Irish Bank, AIB, BOI etc.

The advice is often to sell the stock as it vests, pay the tax and use the funds to invest in global equities (the current available stock universe is roughly 11,000 stocks worldwide) or repay debt (a guaranteed return).

As with all financial decisions, advice is key.  You want to make sure you are as tax efficient as you can be as well as avoid risks that can be mitigated.  If you are in receipt of share-based compensation or have an existing vesting holding, get in touch to start the conversation and build out your personalised financial plan taking into account all these considerations.

We have also prepared a White Paper on share based compensation. If you would like a copy of this please get in touch.

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