CEP Investment Strategies 4

Question 1

A charitable remainder trust (CRT) can be used in equity compensation planning primarily to:

Accepted Answer

Sell appreciated stock tax-free inside the trust and receive an income stream plus a charitable deduction

Answer

A CRT allows the donor to transfer appreciated shares, which the trust sells tax-free, reinvests for diversification, and then pays an income stream to the donor, while the donor receives an upfront charitable deduction.

Question 2

Which of the following scenarios would result in a 'disqualifying disposition' of ISO shares?

Accepted Answer

Selling ISO shares eight months after exercise

Answer

Selling ISO shares within one year of exercise (or within two years of grant) triggers a disqualifying disposition, causing the spread to be taxed as ordinary income rather than capital gain.

Question 3

What does 'net exercise' (also called share withholding) mean in the context of stock option exercises?

Accepted Answer

Shares otherwise deliverable are surrendered to cover the exercise price, resulting in a net share delivery

Answer

In a net exercise, the employee surrenders enough shares at fair market value to pay the exercise price, receiving only the net shares remaining, avoiding any cash outlay.

Question 4

When an employee uses a stock swap to exercise NQSOs, which tax consequence is most important to understand?

Accepted Answer

The holding period of tendered shares carries over only to the replacement shares covering the swap

Answer

In a stock swap, the tendered shares are treated as exchanged; the new shares received in lieu of the tendered shares carry over the original holding period, while the remaining net new shares start a fresh holding period with a cost basis equal to the FMV at exercise.

Question 5

Which metric is most relevant when assessing whether an employee's equity compensation creates an over-concentrated position?

Accepted Answer

The percentage of total net worth represented by employer equity

Answer

Financial planning best practice focuses on employer equity as a share of total net worth to gauge concentration risk, since it captures both vested and liquid equity relative to all assets.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Investment Strategies 4