The NASPP Blog

Are you still providing stock option, or perhaps ESPP, beneficiary forms to your stock plan participants? Say, in an inconspicuous spot tucked toward the back of your stock plan materials, where recipients simply check off a box or two, sign the paperwork, and then hopefully remember to return them to the stock plan department for safekeeping. If so, there’s a good chance you haven’t fully contemplated the number of issues that providing these beneficiary forms to your stock plan participants might cause. In my blog today, I’ll provide some practice pointers to bear in mind as you contemplate whether to continue this process at your company.

Why the big deal?

When a person names a beneficiary, assets can pass directly to whomever the individual designates; they won’t have to go through probate, which can be a lengthy and costly process. This sounds ideal, right? Not so fast! Beneficiary designations override any related wishes made in a will. In other words, a beneficiary made in a will does NOT override a beneficiary designation form.

Practice pointers

1. Out of date beneficiary designations: Employees don’t typically review their beneficiary designations on a regular basis (especially when it comes to equity compensation account data). If Steve completed a stock option or ESPP beneficiary form in 1999 and never updated it, the 1999 beneficiary designation is legally binding. A number of major life events, such as marriage, divorce or the birth of a child (impacting Steve’s original beneficiary objectives), could have occurred between now and the time Steve completed his original stock plan beneficiary designation(s), and these potentially new beneficiary recipients will almost certainly not be reflected in that original beneficiary designation. So, even though Steve’s will might state that he wants his child to inherit his assets, his father will likely be the recipient of his property if he named him as the beneficiary under his company’s stock plan beneficiary form(s) and neglected to update the form after his child was born. Ouch! The alert we just posted on “Supreme Court Holds That Beneficiary is Determined In Accordance With Plan Document” shows what a mess it can be when beneficiary designations aren’t kept up to date.

2. Generic beneficiary forms: Most stock plan departments use a simple, one-page beneficiary form that does not provide for the designation of multiple and contingent beneficiaries or the specification of what percentage of the account holders stock plan assets they’d like distributed to each recipient upon death. As a result, these “plain vanilla” beneficiary type forms probably don’t come close to expressing the true intentions of the account holder.

3. Professional advice: Employees hardly ever seek professional advice prior to completing a company sponsored beneficiary form because the design of these forms is generally very basic. However, account holders don’t realize how the information they have provided in these forms could be interpreted if left without some professional input.

4. Legal conflicts: Many states have laws regarding who can be designated as a beneficiary. For example, in some states, employees can’t designate a beneficiary other than their spouse without the spouse’s consent. The laws are even more complex for employees outside the US. Company sponsored beneficiary forms rarely consider all of these legal restrictions and stock plan administration rarely has the resources to monitor them, yet it can be a significant problem when beneficiary designations violate local laws. The alert I mention above gives you an idea of just how complicated the laws that apply to beneficiary designations can be.

In conclusion

The death of an employee is a pretty rare event, so why go through the trouble of trying to track and maintain current beneficiary forms for your stock plan participants and potentially expose the heirs of your stock plan recipients to some of the above issues. Instead, consider stipulating in your stock plan agreements that options are to be exercised by a legal representative of the estate and be sure to include a reasonable post termination exercise period in your stock plan agreements for termination as a result of death. This will ensure the estate will have had enough time to settle all matters related to the account holders assets and can then exercise any outstanding options.

For more information on this topic, be sure to check out the archive or transcript from the webcast we offered last summer, Death and Divorce: The Lighter Side of Equity Compensation. This topic was also covered in the 2008 NASPP Annual Conference session, “The End is Near: Termination and Retirement Provisions for Options and Awards;” check out the session materials in your Conference books (or order the Conference books and audio if you weren’t able to attend last year). If you are a subscriber to CompensationStandards.com, you can also check out Ed Burmeister’s July 23 blog “Beware of Beneficiary Provisions.”

-Robyn