Estate Planning · Pittsburgh · Tech & Equity Compensation
Equity Compensation and Estate Planning in Western Pennsylvania: RSUs, Stock Options, and What Happens When You Die Before They Vest
An RSU grant, a stock option award, and a brokerage account holding vested shares are three different legal instruments governed by three different documents. None of them are controlled by your will unless your estate plan was specifically designed to coordinate them. For employees and founders at Aurora Innovation, Duolingo, Google Pittsburgh, CMU and Pitt spinoffs, and other Western Pennsylvania technology companies, the estate planning question is not whether you have assets. It is whether the documents governing those assets have ever been read by anyone with estate planning knowledge.
The equity compensation agreement you signed when you joined the company — or when your spinoff was funded — is the document that controls what happens to your unvested shares at death. That document is not your will. It is a plan document administered by your employer or the company’s equity platform. What it says about death, disability, and termination determines whether your unvested shares accelerate, expire, or pass to your estate. Most people have never read it. The estate planning consequences of not reading it can be significant and permanent.
A software engineer at a Pittsburgh-area technology company died unexpectedly at 41. He had $340,000 in vested RSUs held in a brokerage account and $620,000 in unvested RSUs scheduled to vest over the following 26 months. He had a will drafted two years earlier leaving everything to his wife and two children equally. The brokerage account holding the vested shares had a beneficiary designation naming his mother, which he had set when he opened the account before he was married. The unvested RSUs accelerated in full under the company’s equity plan — but they were delivered to his estate as ordinary income, triggering $218,000 in federal and state income tax before they could be distributed. The vested shares in the brokerage account passed to his mother, not his wife, because the beneficiary designation overrode the will. His wife received the proceeds of the will — the house, the bank accounts, and the retirement accounts. His mother received $340,000 in vested company stock that his wife had assumed was part of the marital estate. Four separate legal instruments, none of them coordinated, produced a result that did not match what anyone in the family expected.
Your equity compensation agreement, your brokerage beneficiary designation, your will, and your retirement account beneficiary designations are four separate documents that may say four different things about who gets what when you die. If they have never been reviewed together, your estate plan is incomplete.
Call 412-351-4422 or schedule a consultation to review how your equity compensation fits into your estate plan before the next vesting date.
RSUs: What Happens When You Die Before They Vest
Restricted stock units vest on a schedule — typically quarterly or annually over three to four years. If you die before the vesting date, what happens to the unvested shares depends entirely on the equity plan document, not your will. Most technology company equity plans include one of three treatments at death: full acceleration (all unvested shares vest immediately), partial acceleration (a portion vests based on service completed), or forfeiture (unvested shares are cancelled and returned to the company).
When unvested RSUs accelerate at death, the shares are delivered to your estate and treated as ordinary income in the year of delivery under IRC § 83. That income tax liability becomes an estate obligation that must be paid before distribution to beneficiaries. For large RSU grants, the income tax on acceleration can represent a significant portion of the total value. Whether your estate has liquid assets to cover that obligation without forcing a sale of other assets is a planning question that should be answered before death, not after.
Incentive Stock Options: The 90-Day Problem
Incentive stock options qualify for favorable tax treatment under IRC § 422 only while the holder is an employee. Death terminates employment. Under IRC § 422(c)(7), an ISO may be exercised by the estate or beneficiary for up to 12 months after death without losing its ISO status. The plan document may provide a shorter window. An executor who does not know that ISOs exist in the estate, or who does not understand the post-death exercise window, may allow significant value to expire unrecovered. ISOs not exercised within the plan’s post-death window become nonqualified stock options or lapse entirely depending on the plan document.
The exercise decision after death involves both the exercise price and the income tax consequences. Exercising an ISO within 90 days of death does not trigger the alternative minimum tax preference that would apply during life. The shares receive a step-up in basis to fair market value at the date of death under IRC § 1014. These tax consequences differ materially from the consequences of exercising during the employee’s lifetime, and the executor needs competent advice quickly.
Nonqualified Stock Options and the Step-Up in Basis
Nonqualified stock options do not qualify for ISO treatment. When an NQSO is exercised, the spread between the exercise price and the fair market value at exercise is ordinary income. When an NQSO holder dies before exercising, the options pass to the estate. The estate receives a step-up in basis under IRC § 1014 only on the fair market value of the options at the date of death — which for NQSOs is the intrinsic value (the spread). The income tax on exercise is still owed when the executor exercises, but the basis step-up reduces the capital gain exposure on any subsequent appreciation.
Whether the executor should exercise NQSOs immediately or hold them depends on the option term remaining, the stock price trajectory, and the estate’s overall income tax position for the year of death. These are financial decisions with legal consequences that require coordination between the executor, the estate attorney, and a tax advisor who understands both the equity plan and Pennsylvania estate administration.
If Your Job Comes With RSUs, Stock Options, or Equity Grants
Aurora Innovation, Duolingo, Google Pittsburgh, and the CMU and Pitt spinoff ecosystem have created a significant concentration of equity compensation recipients in Western Pennsylvania. Each company’s equity plan has different treatment for death, disability, and termination. Aurora’s plan may differ from Duolingo’s in how unvested shares accelerate. A CMU spinoff may have founder shares subject to university licensing agreements and right of first refusal provisions that complicate transfer at death entirely.
University spinoff equity presents a specific set of estate planning complications. Shares in a CMU or Pitt spinoff may be subject to transfer restrictions under the technology licensing agreement between the university and the company. The university may hold a right of first refusal that must be offered before shares can pass to an estate beneficiary. The shares may not be freely transferable at all without company consent. An estate plan that assumes spinoff equity can be freely distributed to beneficiaries may fail when the executor attempts to transfer the shares and the company or university exercises a consent requirement or buyback right.
Founder Equity and Pre-Marital Intellectual Property
Founders who received equity at incorporation in exchange for pre-marital intellectual property have a separate property argument in divorce — but the estate planning question is different. Founder shares that were issued years before death may have a very low cost basis, creating a significant capital gain on any sale. At death, the step-up in basis under IRC § 1014 eliminates the capital gain on appreciation up to the date of death. For a founder with $2 million in founder shares purchased for nominal consideration, the step-up at death is worth the capital gains tax that would have been owed on a lifetime transfer. Whether to hold the shares until death or gift them during life requires analysis of the founder’s overall estate, life expectancy, and the company’s anticipated liquidity event.
Founder shares typically carry transfer restrictions, co-sale rights, and right of first refusal provisions under the company’s stockholders agreement. An estate plan that does not account for those restrictions may direct shares to a beneficiary who cannot receive them without company consent, or may trigger a forced buyout at a formula price that undervalues the shares. The stockholders agreement, not just the will, controls what happens to founder equity at death.
Beneficiary Designations on Brokerage Accounts Holding Vested Shares
Vested shares held in a brokerage account pass by beneficiary designation, not by will, under the same rules that govern any TOD account in Pennsylvania. The designation on file with the brokerage at death controls regardless of what the will says. A technology employee who set a beneficiary designation when they opened the account before marriage, before children, or before a divorce may have an outdated designation that passes significant equity compensation assets to the wrong person entirely.
The coordination problem is straightforward but frequently missed: the will may say one thing, the brokerage designation may say another, the retirement account may name a third beneficiary, and the equity plan may have its own death benefit provision. None of these documents talk to each other. The estate plan that coordinates them is the one that produces the intended result. The estate plan that does not is the one that produces the one the family discovers at death.
Pennsylvania Inheritance Tax on Equity Compensation
Pennsylvania inheritance tax under 72 P.S. § 9101 applies to transfers of equity compensation assets at death based on the relationship between the decedent and the beneficiary. Shares of company stock, vested options, and RSUs that have been delivered are taxed at the applicable rate — 4.5 percent for lineal descendants, 12 percent for siblings, 15 percent for others. Unvested equity that accelerates and is delivered to the estate is treated as income first and then as a distributable estate asset subject to inheritance tax on distribution to beneficiaries.
The income tax and the inheritance tax are separate obligations. The income tax on accelerated RSU delivery is owed by the estate in the year of delivery. The inheritance tax is owed on the value distributed to beneficiaries. For large equity compensation estates, understanding both tax obligations before the executor makes any distributions is essential. Distributing equity compensation assets before the income tax and inheritance tax obligations are quantified creates the same personal liability exposure for the executor that any premature distribution creates.
When the Equity Compensation Estate Plan Cannot Be Fixed
The threshold moment for equity compensation estate planning is not death. It is the vesting event before which no one reviewed the plan. An RSU that vests and is deposited into a brokerage account with an outdated beneficiary designation has already been directed to the wrong person. An ISO that expires 90 days after death because the executor did not know it existed has already been forfeited. A stockholders agreement that triggers a forced buyout at a formula price when shares pass to an ineligible beneficiary has already reduced the value the estate receives.
For technology employees and founders in Western Pennsylvania, the estate planning review that matters is the one that happens before the next major vesting event, before a liquidity event, and before any life change that affects who should receive the assets. The equity compensation agreement, the brokerage beneficiary designation, the retirement account beneficiary, and the will need to be read together by someone who understands all four. The time to do that is not when the executor is reading the equity plan document for the first time in the post-death exercise window.
Frequently Asked Questions
What happens to my unvested RSUs if I die?
It depends on your company’s equity plan document. Most plans provide for full acceleration, partial acceleration, or forfeiture of unvested shares at death. The accelerated shares are delivered to your estate and treated as ordinary income in the year of delivery, creating an income tax obligation the estate must satisfy before distributing the shares to beneficiaries. Your will does not control this outcome — the plan document does.
Do my stock options expire when I die?
Under IRC § 422(c)(7), incentive stock options may be exercised by the estate or beneficiary for up to 12 months after death without losing ISO status, though the plan document may provide a shorter window. Nonqualified stock options generally have a longer post-death exercise window but also require action by the executor before expiration. An executor who does not know the options exist may allow them to lapse. Reviewing all equity compensation documents immediately after death is essential.
Does my will control my company stock?
It depends on how the stock is held. Vested shares held in a brokerage account pass by beneficiary designation, not by will. Unvested equity passes under the equity plan document. Founder shares may be subject to transfer restrictions under a stockholders agreement that limits who can receive them regardless of what the will says. A will that does not account for these instruments may produce a different result than intended.
Is there a step-up in basis on company stock at death?
Yes, for shares that are includable in the gross estate. Under IRC § 1014, the basis of appreciated stock held at death is stepped up to fair market value on the date of death, eliminating the capital gain on appreciation that occurred during the decedent’s lifetime. For RSUs delivered after death, the basis is the fair market value at delivery. For ISOs exercised after death, the tax treatment differs from the lifetime exercise rules. The step-up analysis requires understanding both the type of equity and how it passes at death.
What happens to CMU or Pitt spinoff equity at death?
University spinoff equity is often subject to transfer restrictions, right of first refusal provisions, and consent requirements under the technology licensing agreement or stockholders agreement. An estate plan that attempts to pass spinoff shares to a beneficiary without accounting for these restrictions may trigger a forced buyout or fail to transfer at all. Reviewing the licensing agreement and stockholders agreement is a required step in estate planning for anyone holding CMU or Pitt spinoff equity.
For how beneficiary designations interact with wills and Pennsylvania inheritance tax generally, see TOD, POD, and joint accounts in Pennsylvania. For estate planning documents that coordinate these instruments, see estate planning documents in Pennsylvania. For Pennsylvania inheritance tax obligations on equity compensation assets, see Pennsylvania inheritance tax. For prenuptial agreements that address equity compensation and vesting schedules before marriage, see prenuptial and postnuptial agreements in Pennsylvania. For how equity compensation is treated in a Pennsylvania divorce, see high-asset divorce in Pennsylvania.
Lebovitz & Lebovitz, P.A. · Based in Pittsburgh, Pennsylvania, near the Parkway East. Serving Allegheny County and Western Pennsylvania.