5 Tips to Manage Risks of Employee Shares

Employee shares can often feel like a great opportunity – you get to own a piece of the company, share in its success, and potentially grow your wealth. But with the opportunity comes a fair share of risks (pun intended!). If you’re a global citizen working in Singapore or Hong Kong for example, or an expat with a US-based employer, managing these risks is crucial to making the most of your employee shares.

Let’s walk through the five essential tips to manage your employee shares, so you can boost your financial security while avoiding the common pitfalls.

1. Prepare for the Deemed Exercise Tax in Singapore

Starting with a very specific aspect, is the Deemed Exercise Tax (DET), which can be a big shock for anyone planning to leave Singapore or move on from a job where they’ve accumulated stock options, or unvested shares. In Singapore, you might owe DET if you cease to be a tax resident and have unexercised stock options or share awards that you will retain ownership of. The DET essentially taxes you on the “deemed” (aka assumed) exercise or vesting of those shares.

Imagine you’re about to leave Singapore permanently. DET comes into play on any unvested shares or unexercised options the moment you announce your departure, and your employer arranges for your tax clearance. Why? Singapore’s tax system treats this as a last chance to collect tax on benefits received while you were a resident.

How to Plan Around DET

To manage the DET impact:

• Exercise Options Before Leaving: If it aligns with your financial goals and it’s possible, consider exercising some or all of your options before leaving Singapore. This means you pay any associated taxes while still a resident, avoiding surprises later.
• Consult a Tax Professional: DET can be complicated, so it’s wise to chat with a tax adviser who can help you map out a strategy based on your plans and goals.

By being aware of DET, you’re already a step ahead. The goal is to leave no tax stone unturned, so you can hold onto more of your hard-earned wealth!

2. Reduce Concentration Risk

We’ve all heard the saying, “Don’t put all your eggs in one basket.” When it comes to employee shares, this couldn’t be more true. Concentration risk is when you end up with a large portion of your wealth tied up in a single asset or company—in this case, your employer. While it might be great for a few big wins, it can also be risky if the company’s fortunes take a turn.

If you’re banking on your company’s stock for your financial future, remember that even the best companies face ups and downs. When things go south, too much concentration in one stock could mean significant financial setbacks.

How to Manage It

• Gradual Selling: Consider a strategy of selling a portion of your employee shares at regular intervals. For instance, you could sell 10-15% each year to slowly diversify and cap your maximum amount of exposure to the company.
• Use the Funds to Diversify: Take the proceeds and invest in different asset classes—maybe some stocks, bonds, or even real estate. Diversification can provide more stability, cushioning the impact if one asset doesn’t perform well.

Reducing concentration risk lets you benefit from your employee shares while building a well-rounded portfolio that’s more resilient in the long run.

3. Embrace Diversification for a Stronger Financial Future

Speaking of diversification, let’s dive a bit deeper into why it’s such a powerful tool for managing employee shares. Diversification is about spreading your investments across different assets, sectors, or even geographical regions. It’s the ultimate balancing act, helping you weather various market conditions.

To keep things fresh, consider spreading your wealth into:

• Exchange-Traded Funds (ETFs): These funds let you invest in a wide range of assets, from tech stocks to bonds, without buying individual shares in each one.
• Mutual Funds: Similar to ETFs, mutual funds provide access to multiple companies or sectors, helping you spread risk.
• Real Estate or Alternative Investments: Want more than stocks? Real estate or even assets like gold can balance out your portfolio.

When you diversify, you lower the impact of a single asset underperforming. In other words, if your company’s stock takes a hit, other investments can pick up the slack. Diversification is your strategy to build a portfolio that’s not only safer but also more in line with your long-term financial goals.

4. Watch Out for US Estate Tax if Your Employer is US-Based

If you work for a US-based company, US estate tax is one risk you don’t want to overlook. It’s not just for US citizens—non-residents with shares in a US company may face a hefty estate tax bill. Simply put, if you hold onto US shares and something happens to you, your beneficiaries could end up paying estate tax on those assets.

The US imposes estate tax on stock in US companies if the total exceeds $60,000 for non-residents, with some exceptions like tax residents of Australia. This means that if you have employee shares in a US-based company, they’re counted toward this estate tax threshold, which could spell trouble for your heirs.

Strategies to Reduce Exposure

• Look Into Insurance Options: Life insurance policies can help cover any unexpected estate tax costs.
• Regularly Review Your Portfolio: If your employer’s stock has grown in value, it might be time to sell a portion or shift your investments around.
• Ownership Structures: Review other ownership structure options that may allow you to reduce the US estate tax exposure, or increase the threshold beyond which it applies.

Estate tax planning can seem intimidating, but with a proactive approach, you can avoid saddling your loved ones with an unnecessary tax burden.

5. Set Clear Financial Goals and Review Your Holdings Regularly

It’s easy to get swept up in company share schemes without a clear vision of where you’re headed. Setting specific financial goals helps you avoid stockpiling shares for the sake of it and empowers you to make intentional, informed decisions about your holdings.

How to Set and Track Goals

• Define Your Financial Milestones: What are you hoping to achieve with your shares? Maybe it’s retirement savings, a home down payment, or your child’s education fund. Whatever the goal, write it down.
• Create a Review Schedule: Quarterly or annual reviews can help you assess whether your employee shares are on track to meet these milestones. Rebalancing your portfolio if needed ensures your investment strategy aligns with your goals.
• Balance Risk and Reward: If your company’s stock is doing well, it’s tempting to hold on and wait for even more growth. But remember, no stock is bulletproof. It’s worth assessing if the potential reward outweighs the risk.

This regular review process can also highlight other opportunities you might want to explore or even identify risks you hadn’t considered, keeping you ahead of the curve.

Final Thoughts

Employee shares can be a powerful tool to grow your wealth, but they come with their own unique challenges, especially for expats. By understanding the risks, you can turn those challenges into manageable obstacles. Whether it’s planning around Singapore’s Deemed Exercise Tax, mitigating concentration risk, diversifying, safeguarding against US estate tax, or setting and reviewing your financial goals—taking these steps puts you in the driver’s seat.

With a bit of strategic planning and a proactive approach, your employee shares can be a meaningful part of your wealth journey without exposing you to unnecessary risks. Remember, there’s no substitute for professional advice, so consult a financial adviser who can guide you through these complex areas and ensure your portfolio is on the path to long-term success.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.