All over the world, the workplace is changing, and equity, fairness, and transparency have been at the heart of this change while trying to make a profit. One of the ways companies have tried to achieve this is through share options such as Restricted Employee Share Options (ESOP) and Restricted Stock Units (RSU). Employee share options have grown and have become quite popular in Australia.

What happens when Employees Share Options and RSU (Restricted Stock Unit) are moved and vested into a family trust? Well, this is what will be discussed in this article and more.

What is a Restricted Stock Unit (RSU)?

RSUs are share stocks that are employees as a mode of compensation. However, certain conditions must be met for these shares to be given. RSUs are offered to employees through a vesting plan to make the employees invested in the employer’s equity. Interestingly, employees at RSU do not hold any value prior to their vesting; however, they are given a fair market value (FMV) after. Once they are vested, a part of the RSU is kept to pay income tax, while the rest is offered back to the employees.

What is Vesting?

Vesting is an incentive-based program designed for employees, majorly in terms of stock options, which are inserted into the company’s employment terms. This way, the company gets to keep a hold on their best workers while rewarding them with share options for an extended period.

Merits and Demerits of Employees Share Options and RSU

Merits

RSU offers a great advantage to the employee, as it helps retain the best talents and guarantees their motivation to increase the value of their shares. For instance, if an employee decides to wait until the shares are vested, the employee gains the value of the shares while deductions in income taxes and amounts are paid. Since the company cannot issue shares when they are not vested, the dilution of the shares is delayed.

Demerits

RSU does not offer dividends until they are vested. However, the employer pays the dividend equivalent in escrow to help reduce taxes. The restricted stock is contained in the restricted stock for gross income, known as the vesting date. RSUs are not considered tangible property. Hence taxes are not payable to them. Furthermore, they have no voting rights until they are transferrable or vested.

What happens when Employee Share Options or RSU are vested into a Family Trust?

Employee Share Options or RSU are nonforfeiture assets entitled to an employee. Occasionally, RSUs are received when employees retire or after a long period. These nonforfeitable rights accrue during this period.

In the event that they are vested into a family Trust, they will be claimable when the terms of the vestiture (time or performance) have been fulfilled.

Ultimately, the fact that you are vested in your employer’s contributions does not mean you can withdraw money anytime you want, as there are still conditions that must be fulfilled. However, it does mean that when those conditions are fulfilled, you have a lot more to gain, particularly when the company’s stock rises.

Conclusion

Share options can be a great way for employees to feel invested in their company and have a sense of ownership. However, it’s important to understand the tax implications and consequences before vesting them into a family trust. Employees should seek professional financial advice to ensure they are making the best decision for their personal circumstances.

Do you have share options? Have you considered vesting them into a trust? Let us know in the comment section.