Tapping Stock Appreciation Rights to Meet College Costs

Many executives face college educations to pay for while they are simultaneously accumulating wealth for retirement. They can't count on financial aid, and college costs could range upwards of $25,000-70,000 per year.

Ellie, an assistant general counsel for a public company, wants to be ready when Will, 15, is ready for college. She has discovered there are four ways to explore funding her son's education:

  • She has established a 529 plan
  • "Pay as you go" could be part of the solution
  • Custodial Accounts could be established
  • Or, she can use her corporate stock-based compensation

Have you considered using Stock Appreciation Rights (SARs) to fund your child's education?
First, estimate whether the cost is closer to the lower or higher end of the range.  (Ellie pegs son Will at a prestigious state university for $40,000 per year). Then consider how much you may need to supplement funds with other sources, from 529s to other investment accounts. Planning for future education needs allows you to rough out the cost, apply funding sources and pinpoint the shortfall.

Looking to Your Stock Appreciation Rights (SARs)
If you have been granted SARs, you will find they operate in a similar manner to non-qualified stock options (NQOs). With SARs, however, exercise is seamless: you do not have to pay the stock price to exercise or acquire shares, although the taxes will be deducted from sale proceeds. Highly simplified, here's how they work:



Tax consequences

Grant date 1/1/14

Grant of 1,000 shares at $50

No tax

Exercise date 1/15/17

Exercise of 1,000 shares at $90

Ordinary income (at max tax rates) on fair market value of the stock ($40,000)

Sale of stock held after exercise on 1/16/18

Sale of 250 after tax net shares at $100

Capital gains tax on additional appreciation since exercise date ($2,500)

Some companies permit employees to settle in the form of exercise (i.e. taking as cash), or allowing them to continue to hold shares (net of exercise ordinary income tax withholdings), which is advantageous if you prefer to hold on to the stock for future appreciation.

Why SARs for College?
SARs have a long-term compensation timeline, so an executive can look out and count on future dates for exercise. While each company is unique when structuring vesting schedules, SARs generally vest three years-and-a-day from grant date and expire 7-10 years from grant. The long lead time provides predictable liquidity events. Ellie likes having the ability to time future windfalls, matching exercises with college tuition due dates.

SFG can help you quantify the cost of your child's education and put a plan in place for funding. Our analysis will determine how best to integrate your SARs with your other funding sources, the tax implications and balance the competition for dollars between education and retirement funding.
If you know of other public company corporate executives who may find this subject timely and interesting, please pass it along to them.

*The name, likeness, and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.

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Executive Compensation, Non-Qualified Deferred Compensation, Performance Stock Units, Restricted Stock Units, Retirement Planning

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