Equity Compensation After a Spouse Dies: Options, RSUs and 409A

A stock option held at death carries its own expiry date, and that date does not move for probate, for grief, or for a slow reply from human resources. Restricted stock units, performance shares, an employee stock purchase plan, and a deferred compensation account each run on a calendar of their own, written years ago into documents you may never have read.

This guide sorts those calendars. By the end you should know which of your husband’s awards survived him, who may act on them, what must happen by when, how each is taxed, and what to ask the company and your advisers this week rather than next quarter.

The plan documents outrank everyone’s memory

Equity and deferred pay are contracts. The governing plan, the award agreements, the deferral election forms, and any beneficiary designation filed under the plan decide what happens now. A benefits portal summary or a colleague’s recollection is not the contract.

Ask the company, in writing, for every plan document and award agreement and a statement of all grants as of the date of death, showing type, exercise price, vesting, expiration, and the post-death terms of each. Our guide to the first call with his employer covers the wider conversation.

Then settle authority. Some plans let a participant name a beneficiary for awards; if he did not, the company will generally look to his executor, who may need court-issued letters first. In community property states, part of what was earned during the marriage may already be yours. State law varies, so have your estate attorney say whose awards these are before anyone signs.

Vesting at death is a contract term, not a rule

No single rule governs unvested awards. A plan may accelerate everything at death, accelerate a pro rata slice, accelerate time-based units while measuring performance awards at the end of their period, or forfeit what had not vested. Ask for the answer grant by grant, in writing.

Whatever vests or settles after death is generally taxed as the compensation it always was. Publication 559 treats income your husband would have received had he lived, and that was not properly reportable on his final return, as income in respect of a decedent, and its character stays the same in your hands. Publication 525 applies the same label to restricted property that was not substantially vested at death. The value of shares delivered under restricted stock units is therefore generally ordinary income, not capital gain. Our guide to income in respect of a decedent explains who reports it and when.

Options: a window that closes quietly

The award agreement sets how long the estate or beneficiary has to exercise after death. Read two things closely: whether the period runs from the date of death, and whether the option’s original expiration date cuts it short. Unless the plan says otherwise, an in-the-money option left unexercised when the window closes is simply gone.

Incentive stock options receive a rare kindness

Ordinarily, full incentive stock option treatment requires employment from grant until three months before exercise, and no sale before the later of two years after grant or one year after the shares were transferred. Section 421(c) of the Internal Revenue Code switches off both requirements when the option is exercised after death by the estate, or by someone who acquired the right by bequest, inheritance, or by reason of the death. A prompt sale therefore does not become a disqualifying disposition merely because those employment or holding periods were not met. The estate still calculates gain or loss from the stock’s sale price and its correctly determined basis.

The statute does not lengthen the plan’s exercise window. It does provide that the basis of the shares includes the basis of the option itself, a figure your preparer should document. The alternative minimum tax is separate: Publication 525 treats incentive option stock for that purpose as if no special rule applied, although no adjustment is required when the shares are sold in the year of exercise. Ask, too, whether he carried a prior-year minimum tax credit usable on his final return through Form 8801.

Nonstatutory options are income in respect of a decedent

For a typical nonstatutory option that was not taxed at grant, the spread at exercise is ordinary income to whoever exercises: the estate, or you if the options pass to you directly or are properly distributed to you. Suppose the estate holds 10,000 vested options with a $40 exercise price and exercises when the stock trades at $100. The $600,000 spread is ordinary income to the estate. Be wary of selling or giving away the right itself; Publication 559 treats a transfer of a right to income in respect of a decedent as an income-recognition event, generally using the greater of what is received or the right’s fair market value.

Equity compensation does not wait for an estate to settle; it runs on the calendar in the award agreement.

If the estate paid federal estate tax, Publication 559 allows the recipient of such income a deduction for the estate tax attributable to it, claimed only in the tax year the income is reported and, for an individual, only as an itemized deduction.

Deferred compensation follows elections he made years ago

Section 409A lists death among the few events on which nonqualified deferred compensation may be paid, and it bars accelerating the schedule except as Treasury regulations allow. Timing and form, lump sum or installments, were usually fixed by the plan and by his elections when he deferred the pay. Suppose he elected annual installments over ten years. Death is a payment event of its own, and Treasury regulations allow a plan to specify a different time and form for payment on death; their example pays the remaining installments in a single lump sum when a participant dies partway through. Ask which schedule the written plan already provides rather than assuming the ten installments continue or that the administrator can now choose.

The administrator has reason to be unbending. A plan that fails section 409A exposes deferred amounts to immediate income inclusion, an additional tax equal to 20 percent of the compensation, and interest. One rule may help: for a key employee of a public company, the statute’s six-month wait after separation from service ends earlier on death.

Payment follows the beneficiary designation under the plan, which can differ from his will. The IRS instructions say death benefits from nonqualified deferred compensation paid to an estate or beneficiary are reported on Form 1099-MISC, not Form 1099-R; qualified-plan benefits instead use Form 1099-R. Ask whether the promise is unfunded or backed by a rabbi trust and how the claim would rank if the company became insolvent: rabbi-trust assets generally remain available to the employer’s general creditors.

Employee stock purchase plan shares and an offering in progress

If he held shares bought under a plan that set the price at no less than 85 but under 100 percent of the stock’s value at grant, Publication 525 says his death while owning them brings compensation into his income: the lesser of the discount at grant or the excess of the value at death over the price he paid. Your preparer should capture it for the year of death. Separately, inherited shares generally take a basis equal to fair market value at death, under Publication 559.

If an offering period was open, the plan decides whether his payroll contributions are refunded or applied to a final purchase. Section 421(c) also removes the holding-period and employment requirements for a purchase made by the estate, though any later transfer of those shares by the estate counts as a disposition for the discount-income rule above.

If he was an officer or director, trading keeps its own calendar

Illegal insider trading, as the SEC’s investor education site describes it, is buying or selling on the basis of material, nonpublic information in breach of a duty of trust; its examples include family members of officers and directors who were tipped. Spouses hear things. Before the estate sells a share, ask the general counsel’s office whether the company’s trading policy, blackout windows, and preclearance procedure reach the estate or you, and whether any pre-arranged trading plan he had survives him.

What remains is often one very large position. Our guide to an inherited concentrated holding sets out how to reduce it with care.

How his final pay is reported

The IRS instructions for Form 1099-MISC are exact. Wages, vacation pay, and other compensation paid after death but in the year he died are subject to Social Security and Medicare withholding and appear on his Form W-2 in boxes 3 and 5, not box 1. Anything paid after the year of death stays off Form W-2 and is not subject to that withholding. Either way, the payment is reported in box 3 of Form 1099-MISC under the recipient’s name and taxpayer identification number. For 2026 the general box 3 reporting threshold is $2,000; the income is taxable whether or not a form arrives.

Publication 559 adds that such wages are not subject to federal income tax withholding, so large receipts may call for estimated tax payments.

The clocks, in one table

What	The clock	Where it is set
Option exercise after death	The period in the award agreement, possibly capped by the original expiration date	Plan and award agreement
Incentive stock option tax status	No employment or holding-period test for exercise by the estate or an heir	26 U.S.C. 421(c)
Unvested units and restricted stock	Full, pro rata, end of performance period, or forfeited	Plan and award agreement
Deferred compensation	Date and form fixed by the plan and his elections; acceleration generally barred	Plan; 26 U.S.C. 409A
Pay issued in the year of death	Social Security and Medicare on his Form W-2; Form 1099-MISC box 3 to the recipient	IRS Form 1099-MISC instructions
Pay issued in a later year	No Form W-2; Form 1099-MISC box 3 only	IRS Form 1099-MISC instructions
Discounted purchase plan shares held at death	Compensation in his income for the year of death	IRS Publication 525
Deduction for estate tax on such income	Same tax year the income is reported	IRS Publication 559
Sales by an insider’s estate	Company blackout calendar and preclearance	Company trading policy

Questions to ask this week

1. Will you send the plans, every award agreement, and a grant statement as of the date of death?
2. What is the post-death exercise deadline for each option, and who may exercise?
3. Which awards vested because of the death, which are pro-rated, and which were forfeited?
4. Is a beneficiary designation on file under the equity plan and the deferred compensation plan?
5. What payment date and form apply to the deferred compensation?
6. Which tax forms will you issue, to whom, and will anything be withheld?
7. Does the trading policy reach the estate or me, and when does the next window open?
8. For our preparer: did he hold discounted plan shares, incentive option shares, or a minimum tax credit affecting his final return?
9. For our estate attorney: was federal estate tax paid, and which items qualify for the related deduction?

This article provides general U.S. educational information and is not legal, tax, securities, or investment advice. Plan terms control; confirm current rules with the IRS, the company, and a qualified professional who knows your facts.