A recent Fortune article brought up the point that the recent initial public offering of stock by SpaceX is expected to make 4,400 of their employees millionaires, and some 400 have stakes that could be $100 million! The types of jobs that received stock compensation varied greatly, from welders and machinists to coders. That is an extraordinary payday, and after the 180 day lock-up period is over they’ll need to decide what to do with their stock.
Sudden wealth can come with sudden problems. You may have heard the rumor that lottery winners are actually more likely to declare bankruptcy than the average American, or read about sport stars that you thought had a payday that would make them set for life losing their fortune within a decade of retiring. However, this isn’t the case for everyone, and having a payday boon can lead to lasting wealth.
Will these newly minted millionaires keep increasing their fortunes and turn them into a lasting legacy?
The 180 day lock-up period should give the new SpaceX millionaires extra time to create a plan for the new wealth. A big step will be tax considerations. Here’s how the taxes are treated on those options:
Restricted Stock Units (RSUs) and Preferred Stock Units (PSUs)
This is stock that is given as compensation upon meeting certain requirements such as timelines or performance. Upon vesting the value of the shares is taxed as ordinary income. The vesting point defines the basis so the gains or losses afterward will affect the capital gains and associated taxes of those for the year they are sold.
Incentive Stock Options (ISOs)
These options have the most complicated tax treatment. Unlike the stock units, there is no tax liability when the ISO are granted, and there is no income tax when the shares are purchased; however, the spread (the difference between the strike price and fair market price) may trigger the Alternative Minimum Tax (AMT). The lower phaseout amounts set by the One Big Beautiful Bill Act means it’s likely that more high-income earners in 2026 exercising ISOs will be subject to the additional taxes.
More substantially when it comes to tax treatment, should the shares be held for two years after the grant was given and a year after the shares were purchased, they will be subject to capital gains tax when sold instead of ordinary income tax.
Non-Qualified Stock Unit Options (NQSO)
These options are also not taxable based on when they are first granted, but they not qualified for the special tax treatment that would allow them to be taxed at a capital gains rate. Instead, they are taxed as ordinary income on the spread when they are exercised—the difference between the strike price and fair market value—which creates the basis, and then gains thereafter are taxed at the capital gains tax rate.
It may be risky to pay more taxes upfront excising these options early at an ordinary income level since the stock value may go down, but if a large rise in the stock is expected, exercising them early could convert what might be taxed at ordinary income later to be taxed at a capital gains rate.
Understanding what the withholding should be, and how to manage these sales over multiple years is something a tax advisor should be consulted about at the higher income levels. With a sudden influx of wealth in a particular stock, one will have to weigh the tax benefits of spreading out the sale against concentration risk of that stock falling significantly. Most investors prefer an asset allocation plan that creates a diversified portfolio to diffuse that risk.
What about other sudden wealth issues?
Having a higher net worth doesn’t necessarily mean having a much higher cashflow, so big purchases with recurring monthly bills or maintenance costs still need to be considered carefully. Seeing coworkers take the plunge toward spending that new wealth quickly may make it more difficult to be conservative.
Then there are the friends who may show up, looking for a loan or offering an “investment opportunity.” Most difficult of all is broaching the idea that one’s family might not act honorably. Given how public the SpaceX IPO was, keeping the new wealth private may be more difficult than in other cases of sudden wealth, such as a lump sum distribution of retirement benefits, insurance settlements, inheritance, or the sale of a business or investment real estate.
Garden State Trust Company has experience with wealth management. We know all about financial transitions and attendant emotional adjustments. When you come into significant sums, whether it is from stock options or another source, call upon us for:
- personal investment accounts, with asset allocation planning, unbiased investment advice and fees linked to account value (not transactions);
- revocable living trusts, for advice about how a trust can add a measure of financial flexibility, including protection in the case of disability and probate avoidance;
- rollover IRAs to extend the tax-deferral benefits for your retirement money.
If you be will creating sudden wealth for someone else
If your estate plan includes a substantial legacy for a younger family member who lacks full financial maturity, consider using a trust for the bequest. Your trust will be a gift of more than financial resources. You will be including our investment and financial management expertise as well. A gift or bequest in trust can provide for a lifetime of financial security.
We look forward to being of service.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
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