Smart decisions for complex finances: What every successful executive needs to consider

A successful executive will likely have exposure to many of the following financial situations or strategies. A thorough understanding of each of them can help optimize the financial position of an executive and their families.

Equity compensation

To retain top talent and directly correlate compensation of key individuals to company performance, many executive compensation packages have a significant portion in equity. This equity can be granted in various ways, including, but not limited to, restricted stock, stock options (non-qualified and/or incentive), performance units, and/or phantom stock. Tax treatment for each type of award varies, as well as the ability of the executive to maintain a portion of the position once vested. Key considerations include whether the company is publicly traded, the timing of taxation, holding requirements, and the overall exposure the executive wishes to maintain in the company. The wealth planning process that BMO utilizes comprehensively analyzes these matters and assists executives in making informed decisions as it pertains to this key component of overall compensation packages.

Diversification

One of the most significant concerns a corporate executive may have pertains to their overall concentration and exposure to stock ownership in the company they work for. A sizable position in a single company could have an outsized impact on an executive’s wealth as a result of a move in the value of the position (whether positive or negative). One strategy to assist in mitigating this risk is a variable prepaid forward contract. These contracts allow an individual with a substantially concentrated position in a single stock (publicly traded or privately held) to establish diversification strategies while deferring taxation, as well as the transfer of ownership in the stock, that would occur as a result of the outright sale of the concentrated position.

In a variable prepaid forward contract, the executive sells a right to their stock position, typically at a slight discount to its current value. The value is established today; however, the total number of shares will be determined in the future, at the occurrence of the “triggering event” based on performance of the stock. As a result, capital gains tax from the sale of the position is not due at the time of the forward contract as the transaction is not finalized, or “settled.” This receipt of cash (the purchase price of the contract) in advance of the formal sale of the position allows the executive to invest the proceeds in a diversified portfolio, potentially reducing their overall risk exposure.

The contract carries a timeframe or other triggering event(s) which will require the executive to officially sell the position in the future and potentially recognize taxes at that time. Depending on the value of the stock at that triggering event, the buyer may receive less, or more, than they originally paid for the position. Additionally, the executive may be able to retain some of the stock position, if the stock outperforms the benchmarks set in the contract.

A second option to consider is an exchange fund (not to be confused with an exchange-traded fund, or ETF). In an exchange fund, a partnership is established where multiple investors holding significantly concentrated positions pool their stock in exchange for units of the entire partnership. The partnership unit value is based on the aggregate performance of the underlying positions allowing for a more diversified exposure on this portion of the executive’s wealth. As the concentrated position is not sold, but rather exchanged for the partnership units, capital gains tax is deferred.

Finally, borrowing against the position may be a viable option for consideration. Current law allows for the interest expense associated with borrowing for investment purposes to potentially offset income generated from the assets purchased with the borrowed dollars. The deductibility of the expense is capped at net investment income, and not all types of investment income apply. Furthermore, the interest rate environment for the loan, along with other terms, may negate any potential benefit. As with any strategy, it is strongly advised you speak with your qualified tax and/or legal professionals before implementing to ensure implementation is optimal for your situation.

IPO planning

For executives at privately held companies, one of the most exciting times can be that of the company’s initial public offering (IPO). However, key shareholders will likely be subject to a post-IPO blackout period, limiting their ability to capture the value of their position for some time. While the desire may be to begin diversifying the position immediately post-blackout, consideration should be taken around the risks that may carry. As part of the wealth planning process, a BMO Senior Wealth Strategist can analyze and model various diversification strategies, post-blackout, to assist in making informed decisions.

Retirement savings

Federal regulations limit the amount one may contribute to qualified retirement plans. For executives earning significant total compensation, these limits represent a small fraction of total income, and even over a significant time horizon, likely only replace a small amount of desired income in retirement.

Many companies provide additional savings opportunities for highly compensated executives. One such plan is a non-qualified savings plan, which allows individuals earning over a specified amount to contribute additional money on a tax-deferred basis for retirement. These plans carry certain limitations and requirements (e.g., payout elections must be made each year contributions are made, investment options may be limited, and maximum eligible compensation amounts may apply). However, the ability for the executive to defer additional income toward retirement can be significant. When combined with maximum salary deferrals to a traditional plan such as a 401(k), an executive may be able to invest substantially more for retirement, while deferring taxation during high-income years.

Estate planning

Executives spend countless hours heavily invested in the businesses they work for. At times, this comes at the neglect of ensuring their personal affairs are in order. Defining goals for accumulated wealth and determining how financial affairs will be managed in the event that the individual is unable to do so, are key items a sound estate plan will address.

Depending on the size of the estate, and the direction a wealth plan projection illustrates, further estate planning beyond the basics may be prudent. Current legislation allows for a sizable amount of wealth to be transferred during life, or at death ($13.99 million per person in 2025), providing significant opportunity for those looking to begin transferring assets outside their taxable estate and onto future generations.

In closing

Executives have likely invested a significant amount of time and energy to reach their level of professional success. This brings complexities they may not have considered previously, or that may feel overwhelming. Our advisory team at BMO Wealth Management, led by a dedicated Wealth Advisor, is here to partner with executives at all levels and help guide them through these key decisions and many more. Let BMO help ensure a plan is in place to assist in pursuing important personal goals and wishes.