What Happens to Unvested Stock Options in an Estate? (w/Examples) + FAQs

When an employee dies, their unvested stock options are, by default, forfeited and disappear entirely. This happens because the “Termination of Service” clause, a standard provision in nearly every corporate equity incentive plan, legally defines death as just another form of employment termination, like quitting or being fired. The immediate and devastating consequence is that a family’s expected multi-million dollar inheritance can instantly become worthless, as the contractual condition of “continued service” required for vesting can no longer be met.

This contractual reality creates a brutal conflict between a family’s perception of wealth and the legal status of that wealth. For the more than 14 million U.S. employees participating in stock ownership plans, a significant portion of their net worth exists only as a future promise, not a current asset. This guide breaks down exactly how that promise is broken by death and what, if anything, can be done to save it.

Here is what you will learn to solve this problem:

📜 You will learn to identify the specific clauses in company stock plans that control your options after death, overriding even a will.
🚀 You will understand the powerful but rare exception called “vesting acceleration” and the three forms it takes.
💸 You will learn the critical tax differences between Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) in an estate and why one is a ticking tax bomb for your heirs.
🌍 You will discover the hidden traps for international employees and families, where different countries’ laws can create unexpected tax nightmares.
💪 You will get a step-by-step playbook for executors to follow to locate, evaluate, and potentially rescue these valuable assets before they expire.

The Foundational Conflict: Your Will vs. The Company’s Plan

The first and most jarring realization for any family or executor is that a person’s Last Will and Testament has almost no power over their stock options. The company’s legal documents, specifically the Equity Incentive Plan and the individual Grant Agreement, are the supreme authority. A will can only distribute property that a person legally owns and that becomes part of their estate; it cannot bring an asset back to life that was contractually terminated at the moment of death.

This is because stock options are not a simple gift; they are a contract. That contract is designed with one primary purpose: to keep the employee working for the company. This retention mechanism is called a vesting schedule.

Vested vs. Unvested: The Only Distinction That Matters

Every discussion about equity compensation begins and ends with the distinction between vested and unvested awards. This single concept determines whether you own a valuable asset or just hold a fragile promise.

Status	What It Means	What Happens at Death (Default)
Vested	You have earned it. You met the company’s service or performance requirements. It is your legal property.	Becomes an asset of your estate. It can be transferred to your heirs or beneficiaries as directed by your will or beneficiary designation.
Unvested	You have not earned it yet. It is a promise of future ownership, contingent on you continuing to work.	It is forfeited and returned to the company. It never becomes an asset of your estate and simply vanishes.

Companies use vesting as “golden handcuffs” to incentivize employees to stay. The unvested portion is the price you pay for leaving early. Because death is legally classified as the ultimate departure from service, the system, by default, exacts that price.

The Document Hierarchy: Why the Company Plan Is King

When an employee dies, the executor must ignore the will at first and immediately locate the company’s equity documents. These papers form a hierarchy of control, and understanding them is non-negotiable.

The Grant Agreement: This is the specific contract the employee signed for a particular batch of options. It details the number of options, the exercise price, and the vesting schedule.
The Equity Incentive Plan: This is the master document that governs all equity awards the company issues. It contains the universal rules, including the critical definitions for “Termination of Service” and any exceptions for death.
Corporate Bylaws: In some cases, the company’s foundational bylaws may contain overarching rules that affect stock issuance and transfers.

The grant agreement and the equity plan are the law. They dictate what happens, and no amount of pleading or appeals to fairness can change their contractual terms after the fact. The only hope for an estate is to find a pre-existing exception written into these very documents.

The Lifeline Exception: Vesting Acceleration Upon Death

While forfeiture is the harsh default, many companies choose to write in a compassionate and powerful exception to this rule: vesting acceleration. This is a contractual clause that automatically fast-forwards the vesting schedule upon a specific event, such as an employee’s death. Finding this clause is like discovering a winning lottery ticket in the deceased’s desk drawer.

Acceleration provisions are not standard and their generosity varies wildly from company to company. An executor’s first mission is to scour the plan documents for language describing one of three common scenarios.

Scenario 1: Automatic Full Acceleration (The Best Case)

This is the most favorable outcome for an estate. The plan document explicitly states that upon an employee’s death, 100% of all unvested equity awards immediately become fully vested and exercisable. This provision instantly transforms a worthless promise into a tangible, valuable asset for the family.

Many large, established public companies offer this as a competitive benefit. For example, Johnson & Johnson’s plan provides for the full vesting of all unvested stock options and RSUs upon death. Similarly, a proxy filing from Western Digital specifies that “all unvested stock options held by the employee at the time of death will immediately vest and be exercisable”.

Triggering Event	Contractual Consequence
Employee Death	100% of unvested options and RSUs immediately become vested and are transferred to the estate or beneficiary.

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Scenario 2: Partial or Pro-Rata Acceleration (A Common Compromise)

A more common approach is for a company to accelerate only a portion of the unvested awards. This is often calculated on a “pro-rata” basis, designed to credit the employee for the portion of the vesting period they completed before their death. This method acknowledges the service performed without granting the full award, which was intended to incentivize future service.

For instance, the same Western Digital plan that provides full acceleration for stock options has a different rule for Restricted Stock Units (RSUs). It states that only “a pro rata portion of the stock units due to vest on the next vesting date will immediately vest”. This is a more calculated approach that balances goodwill with the company’s retention goals.

Triggering Event	Contractual Consequence
Employee Death	A portion of unvested awards becomes vested, often calculated based on time served during the current vesting period. The remainder is forfeited.

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Scenario 3: Discretionary Acceleration (The Fight for Value)

This is the most uncertain and challenging scenario for an executor. Some plans do not grant any automatic acceleration but instead give the company’s board of directors or compensation committee the discretion to accelerate vesting upon an employee’s death. This is not a right; it is merely a possibility that must be actively pursued.

In this situation, the executor cannot assume the options are worthless. They have a fiduciary duty to formally contact the company’s HR or stock plan administrator and “advocate and or petition for acceleration”. This shifts the executor’s role from a simple administrator to a determined advocate for the estate.

Companies desire this flexibility, but they are also under pressure from proxy advisory firms like Institutional Shareholder Services (ISS), which scrutinize acceleration as a potential “windfall” for executives not tied to performance. While acceleration upon death is almost always seen as an acceptable use of discretion, an executor’s request should be framed not just on compassionate grounds but also by highlighting the deceased’s unique contributions, justifying the board’s decision as a reward for exceptional service.

Triggering Event	Contractual Consequence
Employee Death	No automatic vesting. The executor must formally petition the company’s Board of Directors, who may or may not approve acceleration.

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The Executor’s Playbook: A Step-by-Step Guide to a Ticking Clock

When an employee with stock options dies, their executor is immediately thrust into a high-stakes race against time. They must navigate a complex legal and financial maze where a single misstep can erase a fortune. The process is governed by strict deadlines, and missing one can mean the permanent loss of a major estate asset.

Step 1: Locate and Analyze the Governing Documents (Days 1-14)

The first and most urgent task is to find all equity-related paperwork. This includes the employment offer letter, every individual stock grant agreement, and the summary of the master equity incentive plan. These documents are the only source of truth. The executor must read them with a focus on sections titled “Vesting,” “Termination of Service,” and any specific clauses related to “Death” or “Disability”.

Step 2: Formally Notify the Company (Days 7-21)

The executor must officially notify the company’s Human Resources or Stock Plan Administration department of the employee’s death. This notification must be accompanied by two critical legal documents:

A certified copy of the death certificate.
Letters Testamentary (or Letters of Administration), which is the official court order appointing the executor.

This step is crucial because it establishes the executor’s legal authority to act on behalf of the estate regarding the equity awards. Without Letters Testamentary, the company cannot legally engage with the executor.

Step 3: Identify the Post-Termination Exercise Period (PTEP)

Vested stock options do not last forever. The plan documents will specify a Post-Termination Exercise Period (PTEP), which is a limited window during which the estate must exercise the options. While a typical PTEP after quitting a job is 90 days, plans often provide a longer period in the event of death, commonly one year.

This deadline is absolute. If the estate fails to exercise the options within the PTEP, the options expire and become permanently worthless. An executor who lets this happen has likely breached their fiduciary duty and could be sued by the beneficiaries for the full value of the lost asset.

Step 4: Make the High-Stakes Exercise Decision

Exercising the options is not always the right choice. The executor must perform a careful financial analysis, considering several factors:

The “Spread”: Is the stock’s current market value higher than the option’s exercise price? If not, the options are “underwater” and worthless.
Liquidity: Does the estate have enough cash to pay both the full exercise price and the immediate income taxes triggered by the exercise? This is often the biggest hurdle and can be a trap for cash-poor estates.
Market Risk: If the company is publicly traded, what is the risk of the stock price falling after exercise? If the company is private, there is no public market to sell the shares, meaning the estate could be stuck with an illiquid asset of uncertain value.

Step 5: Navigate the Transfer and Exercise Mechanics

Once the decision is made, the executor must work with the company’s stock administrator (often a third-party firm like Fidelity, Morgan Stanley, or Computershare) to transfer the awards into the name of the estate. This process almost always requires a Medallion Signature Guarantee.

A Medallion Signature Guarantee is not a simple notary stamp. It is a special signature authentication provided by a financial institution that guarantees the signature is genuine and that the person signing has the legal authority to make the transfer. Obtaining this can take time and should be initiated early.

Step 6: Deal with the Probate Process Conflict

Probate is the court-supervised process of settling an estate, and it is notoriously slow, often taking a year or more. This creates a direct and dangerous conflict with the short PTEP for stock options. An executor cannot wait for probate to finish before acting; the options would have expired long ago.

This is why obtaining the Letters Testamentary at the very beginning of the probate process is so critical. Those letters are the key that unlocks the executor’s ability to deal with the company and exercise the options before the deadline.

One of the best ways to avoid this conflict entirely is through a beneficiary designation. If the company’s plan allows an employee to name a beneficiary for their equity awards, the options can pass directly to that person outside of the probate process, allowing for a much faster transfer.

The Tax Minefield: A Painful Surprise for Heirs

The tax implications of inherited stock options are a labyrinth of complex rules that can create shocking tax bills for unprepared families. The rules are counter-intuitive: the Incentive Stock Option (ISO), which is tax-favored during an employee’s life, often becomes a tax nightmare for an estate, while the Non-Qualified Stock Option (NSO) is more straightforward, though still costly.

The Most Important Tax Concept: Income in Respect of a Decedent (IRD)

To understand how inherited options are taxed, you must first understand a critical IRS concept called Income in Respect of a Decedent (IRD). IRD is any income that the deceased person was entitled to earn but had not yet received at the time of their death. When the estate or a beneficiary later receives this income, they are responsible for paying the income tax on it.

The most crucial feature of an IRD asset is that it does not receive a “step-up in basis” at death. This is a massive exception to the general rule for inherited assets like regular stock or real estate and is the source of most tax pain.

The “Step-Up in Basis” Your Heirs Won’t Get

For most inherited assets, the tax code provides a huge benefit called a “step-up in basis.” The asset’s cost basis—the value used to calculate capital gains—is adjusted from its original purchase price to its fair market value on the date of death.

For example, if your uncle bought Apple stock for $1 per share and it’s worth $150 on the day he dies, you inherit it with a new cost basis of $150. You can sell it the next day for $150 and owe zero capital gains tax. The step-up erases a lifetime of appreciation for tax purposes.

This benefit does not apply to the income component of stock options because they are treated as IRD. The value is treated as compensation that was earned but not yet paid, and the tax bill comes due when the heir finally receives it.

ISOs vs. NSOs: A Comparison of Tax Headaches for Heirs

The income tax treatment for an heir depends entirely on which type of option they inherit.

Tax Attribute	Incentive Stock Option (ISO)	Non-Qualified Stock Option (NSO)
Primary Tax Event for Heir	Exercise of the option.	Exercise of the option.
Tax at Exercise	Extremely complex. The exercise can trigger the Alternative Minimum Tax (AMT), a separate and confusing tax calculation that can result in a large, unexpected bill. Often, the ISO loses its special status upon death and is taxed just like an NSO anyway.	Straightforward. The “spread” (the difference between the market value at exercise and the exercise price) is taxed as ordinary income to the heir in the year of exercise.
Is it IRD?	Generally no, unless it loses its qualified status and is treated as an NSO.	Yes. The spread at exercise is considered Income in Respect of a Decedent.
Step-Up in Basis on Spread?	No. The income component is not eliminated by a step-up in basis.	No. As an IRD asset, there is no step-up in basis on the income component.
Key Takeaway for Heirs	High complexity and potential for a surprise AMT liability. The supposed tax benefits of an ISO are largely lost after death.	Simpler to understand but guarantees an ordinary income tax liability for the heir upon exercise.

International Complexities: A World of Tax Trouble

For families with international ties, the already complex rules surrounding stock options can become exponentially more challenging. Cross-border estate planning involves navigating a minefield of conflicting tax laws, legal systems, and treaties that can lead to double taxation and the failure of traditional estate plans.

U.S. Citizens and Green Card Holders Abroad

The United States is one of the few countries that taxes its citizens and residents on their worldwide assets, regardless of where they live or die. There is no foreign earned income exclusion for estate and gift taxes. This means a U.S. citizen working for a German company in Berlin with stock options in that company will still have those options subject to U.S. estate tax.

A critical complication arises when a U.S. citizen is married to a non-U.S. citizen. The unlimited marital deduction, which allows assets to pass to a surviving spouse tax-free, is not available if the surviving spouse is not a U.S. citizen. This can trigger an immediate and substantial estate tax bill upon the death of the first spouse. Special tools like a Qualified Domestic Trust (QDOT) may be needed to defer this tax, but they come with their own set of complex rules.

Non-U.S. Citizens with U.S. Assets

The rules are equally perilous for non-resident aliens (NRAs) who own “U.S. situs” assets. These are assets legally considered to be located in the United States, and they include a crucial category for many global executives: stock in a U.S. corporation. An executive from Japan working in Tokyo for a Japanese company who has RSUs in a U.S. subsidiary like Microsoft or Apple holds a U.S. situs asset.

The tax treatment for NRAs is severe:

Minimal Exemption: While a U.S. citizen has a federal estate tax exemption of over $13 million (as of 2025), a non-resident alien is entitled to an exemption of only $60,000. Any U.S. situs assets valued above this tiny threshold are subject to U.S. estate tax.
Domicile vs. Residency: U.S. estate tax is based on “domicile,” not just residency. Domicile is a more permanent concept of where one intends to live indefinitely. It is possible to be a U.S. resident for income tax purposes (e.g., on a work visa) but a “non-domiciliary” for estate tax purposes, creating a confusing legal status that requires expert guidance.

Common Law vs. Civil Law: A Clash of Systems

Estate planning itself differs fundamentally around the world. The U.S. and U.K. operate under a common law system, which allows individuals significant freedom to distribute their assets through wills and trusts.

In contrast, most of Europe, Latin America, and parts of Asia operate under a civil law system, which often imposes “forced heirship” rules. These laws dictate that a certain percentage of an estate must pass to specific relatives, like children, regardless of what a will might say. An American-style trust holding stock options may not be legally recognized in a civil law country, causing the entire estate plan to fail and assets to be distributed in unintended ways.

Mistakes to Avoid: Common and Costly Errors

The path of administering stock options in an estate is littered with traps. A single mistake can have irreversible financial consequences. Here are the most common and devastating errors to avoid.

Mistake 1: Assuming the Will Is in Charge. Believing that the will controls the fate of stock options is the most fundamental error. The company’s plan documents always take precedence. If the plan says unvested options are forfeited, they are forfeited, no matter what the will says.
Mistake 2: Missing the Exercise Deadline (PTEP). Every vested option has an expiration date after death. The Post-Termination Exercise Period is often just one year. Missing this deadline is like letting a winning lottery ticket expire—the value is lost forever, and the executor may be held liable.
Mistake 3: Not Planning for the Liquidity Squeeze. Exercising options requires cash, often a lot of it, for both the purchase price and the taxes. An executor who hasn’t planned for this may be forced to let valuable “in-the-money” options expire simply because the estate lacks the funds to act.
Mistake 4: Assuming Unvested Options Are Worthless. While forfeiture is the default, it is not universal. An executor has a duty to investigate. Failing to read the plan documents and discover an acceleration clause is a catastrophic failure to secure a potentially massive estate asset.
Mistake 5: Ignoring the Tax Consequences. The tax bill from exercising options can be a shock. An executor who exercises NSOs without setting aside cash for the ordinary income tax, or who exercises ISOs without consulting a tax advisor about the AMT, can create a financial crisis for the estate.
Mistake 6: Not Updating Beneficiary Designations. If the plan allows for beneficiary designations, they override the will. An old, forgotten designation naming an ex-spouse could inadvertently send the entire value of the equity to the wrong person, leading to family disputes and litigation.

Proactive Planning: Do’s and Don’ts for Employees

The best way to handle stock options in an estate is to plan for them during your lifetime. A reactive executor is performing a salvage operation; a proactive employee is building a fortress.

Do’s	Don’ts
DO read your grant agreement and equity plan now. You must know your company’s specific rules for death, disability, and retirement.	DON’T assume your company has a generous acceleration policy. Forfeiture is the default, especially at startups and private companies.
DO name a beneficiary if your plan allows it. This is the single best way to bypass the slow and costly probate process.	DON’T forget to update your beneficiaries after major life events like marriage, divorce, or the birth of a child. An outdated form can cause chaos.
DO create a “liquidity plan” for your estate. Earmark a specific account or purchase a life insurance policy to cover the exercise price and taxes.	DON’T keep your equity compensation a secret. Your executor and family need to know what you have, where the documents are, and who to contact at the company.
DO transfer vested shares (not unexercised options) into a Revocable Living Trust. This ensures they avoid probate and can be managed seamlessly by your successor trustee.	DON’T try to transfer unvested options or RSUs into a trust. Most plans strictly prohibit this, and doing so could trigger their forfeiture.
DO consult with an estate planning attorney and a financial advisor who specialize in equity compensation. This is a niche and complex area of law and finance.	DON’T rely on a generic will or online form to handle a multi-million dollar equity portfolio. It is not sufficient.

Frequently Asked Questions (FAQs)

What is the single most important thing to know about unvested stock options in an estate? Yes, that they are forfeited by default. Unless the company’s plan explicitly provides for acceleration upon death, their value is lost forever and they do not become part of the estate.

Can my will decide who gets my stock options? No, not directly. The company’s plan documents determine if the options survive death. If they do, a beneficiary designation will override your will. Your will only directs assets that actually enter your probate estate.

If options are accelerated, does my estate still have to pay to exercise them? Yes. Acceleration only turns unvested options into vested ones. The estate must still pay the full exercise price and any resulting income taxes to acquire the shares of stock.

How long does my executor have to exercise my vested options after I die? No, there is a strict deadline. The Post-Termination Exercise Period (PTEP) is defined in the plan documents and is often one year. If the deadline is missed, the options expire and become worthless.

Can I put my unvested stock options into a trust to avoid probate? No, almost certainly not. Most equity plans strictly prohibit the transfer of unvested awards. Attempting to do so could cause them to be forfeited immediately. You can often name a trust as the beneficiary, however.

Are the tax rules the same for all inherited stock options? No, they are very different. Inherited Non-Qualified Stock Options (NSOs) trigger ordinary income tax for the heir upon exercise. Inherited Incentive Stock Options (ISOs) have more complex rules and can trigger the Alternative Minimum Tax (AMT).

What happens if my company is private and not publicly traded? Yes, the risks are much higher. The estate must still find cash to exercise the options and pay taxes, but it will acquire illiquid shares with no public market to sell them on, creating significant financial risk.

Does it matter if I am a U.S. citizen living abroad or a non-citizen? Yes, it matters immensely. U.S. citizens are taxed on worldwide assets. Non-citizens with U.S. company stock face a very low $60,000 estate tax exemption, which can create a surprise tax bill for their families.