Transcript
Intro
Stephan Shipe:
Welcome back to the Scholar Advising Podcast. Today we’re answering questions about private jets, stock options, and estate planning. We’ll break down what to consider when deciding between buying a jet outright or sticking with fractional ownership, how to approach exercising a large stock option package, and what your options are if one of your kids needs more financial help than the others.
And in this week’s advisor red flag segment, we’re talking about why anyone claiming that they can make your stock options tax-free is probably selling you something worse than taxes. So let’s go ahead and get started with Question 1.
Question 1: Does Owning a Private Jet Make Financial Sense Compared to Fractional Ownership?
Listener:
Our family has been using fractional jet ownership for years, but now we’re thinking about buying a light jet outright. With tax deductions, depreciation rules, and rising costs—how do we figure out if owning a plane actually makes financial sense for us?
Stephan Shipe:
This is a great question and a lot to unpack when it comes to this big jump from fractional ownership into actually owning the plane. A few things we need to take into account.
First is the obvious: you have to buy the plane, which is the upfront cost associated with it.
Now, there are some tax benefits there—especially if it’s used for business—when it comes to deductibility and depreciation. But from a total cost perspective, for a light jet, you’re looking at somewhere around that $3 to $10 million cost upfront. That varies depending on the type of jet you get into. Some of these Citation jets are in the lower range, the $3 to $5 million mark. You get into your HondaJets or similar, and you’re going to be up around that $10 million purchase.
Now, once the jet is purchased, we have to handle the ongoing costs, which vary significantly. You’re going to have your maintenance costs. You’re going to have hangar fees, your insurance, obviously—all the usual things.
The biggest misconception around ownership versus fractional ownership is the scheduling. People think: “If I own the plane, I won’t have to worry about this anymore.” And that’s not necessarily true—especially on the light jet side. You’re likely not going to have a full-time salary for pilots and crew. So you’re still going to be contracting out to some organization to coordinate all of that for you, which means you’re still scheduling pilots, you’re still scheduling crew.
The difference is that now you are handling more of the coordination—around maintenance, fuel, hangars, and insurance—whereas fractional ownership would be taking care of that for you.
Now, that’s not to say fractional ownership is absolutely the way to go. There are definitely benefits on the ownership side. The bonus depreciation aspects and depreciation of assets is a huge benefit—but it has to be for business use. If you’re buying the jet for business use, then yes, there’s a lot of recent tax law that would help, allowing you to depreciate it, which could reduce the cost. But if it’s purely for personal use, you’re not going to be able to depreciate those costs. So you wouldn’t have that deductibility benefit.
Let’s talk about the ongoing cost. When you combine everything, you’re probably in the $500,000 to $1 million range annually to run a light jet. That, of course, varies widely because fuel is going to be your biggest expense, depending on how much it’s used.
When you compare that to fractional ownership, for a light jet you’re likely in that $5,000 to $7,000 range per flight hour. So you really need to be flying around that 200-hour mark. If you’re logging 200-plus flight hours a year, then it starts to make sense—maybe it’s better to go ahead and own the plane and be able to divide all of these ongoing overhead costs—engine overhauls, hangar fees, etc.—over more flight hours to drop that price down.
If that’s the case you’re looking at, I would start to look more seriously at what those costs are. Start getting quotes—hangar fees, insurance, maintenance (which is easy to find quotes for). Get all of that together and start dividing that by what you’re currently using or expect to use in flight hours per year. Then use that as a direct comparison to your overall cost right now for fractional ownership.
Any delta between those two numbers really comes down to whether or not you want to handle the coordination in-house—or whether you have someone who can handle that coordination for you, and what that added cost would be.
There’s no question you’ll have more flexibility when it’s your own plane. But the issue is, you’re not going to have complete flexibility unless you’re paying a full-time salary for a pilot and crew, with the plane just sitting there waiting for you at any time—which is generally not the case. I wouldn’t want you to get into a situation where you think that’s what you’re buying: “As long as I own the plane, I can leave at any time.” It’s like—yeah, kind of. Unless you’re paying that full-time salary, you’re still going to be coordinating when the crew and pilot get there in order for you to take off.
Of course, it is an asset. There are benefits from a resale and liquidity perspective. But it really is going to come down to—I’d almost look at the purchase price as a sunk cost. What matters is the annual cost and the hourly use comparison between fractional ownership and owning it yourself.
Question 2: What’s the Smartest Way to Exercise My Stock Options?
Listener:
I’m an executive with a big stock option package, and I want to make the most of it. What’s the smartest and safest way to exercise those options so I can keep as much as possible after taxes?
Stephan Shipe:
Yeah, so a little bit of ambiguity here. We don’t know how big the stock option package is, but I’m going to throw out a couple of things for you to consider.
One is going to be the timing of the exercise and how long you hold the shares after you exercise. I’d say that’s the biggest factor when it comes to taxes. A lot of the different strategies you hear about, and many of the plans you’ll see, are all aimed at minimizing the tax impact—which I think is what you’re getting at. And a lot of that comes down to timing, just like when you buy a stock and are dealing with long-term versus short-term gains.
The biggest thing you need to start taking into account is what’s known as AMT, or alternative minimum tax. The idea here is that—whether you know it or not—there are two parallel tax systems in the United States. You have your regular tax brackets, and then there’s a sort of shadow tax bracket called the alternative minimum tax. Its purpose is to calculate what you would owe if you add back in all deductions and preferences, ensuring there’s a minimum level of tax every taxpayer has to pay.
Option exercises, especially for ISOs, really come into play here. What you have to watch out for is the timing. For a quick review: let’s say your strike price is $10 per share and the fair market value at the time of exercise is $50. You have $40 of built-in value. So when you exercise those shares at $10 and now own something worth $50—even though you haven’t sold them yet—that $40 counts toward your AMT calculation.
Which means that even though you haven’t liquidated anything and haven’t received any cash yet, you’re going to have to consider AMT exposure. The government is well aware that you just exercised something with a $10 strike price and a $50 fair market value, so that $40 starts playing a role in your tax picture.
That’s one that surprises a lot of people. I hear it all the time: “Stephan, I didn’t do anything—I just exercised my options. I haven’t received any money, and I still owe tax?” So, knowing that’s the case, what we usually recommend is spreading out the exercises over time so you’re not doing it all at once.
If possible, gradually exercising can help keep you under the AMT exemption thresholds. That’s one strategy.
Another key one is automating sales of the stock you already own. That means taking a hard look at your 10b5-1 plan to make sure you’re setting up scheduled sales. Ideally, you’re selling shares that have been held for over a year so they qualify for long-term capital gains treatment, which is more favorable.
This way, if you need to exercise more shares, you’re not stuck with an overly concentrated position in a single stock—and you’re not adding new risk to what should be a financial benefit.
So we’re talking about three core ideas: favorable holding periods, gradual liquidation, and gradual exercise. It’s really easy to say, “Well, I already own the stock, let me sell it over time.” But realistically, you’re going to be selling over time and exercising over time too. It becomes a bit of a dance—every year you exercise some, sell some, and look at which tax lots are most efficient to sell based on long-term gains.
This is a really great question because people often don’t take this into account until it’s too late. They find themselves with all these options and wonder how to get out. And they don’t like hearing that it may take years to exercise and sell in the most tax-efficient way.
I’m glad you’re looking at this now and thinking ahead. Just know that there are a lot of moving parts when it comes to these plans, and it really warrants a deep look at your personal situation—your tax rate, your expected income at the time of exercise, and any restrictions around when you can exercise or sell, beyond what you may be expecting.
Question 3: How Do I Handle Unequal Financial Needs Among My Kids in Estate Planning?
Listener:
One of my kids needs a lot more financial help than the other because of her career and life choices. What kind of options do I have if I want to help her more but still be fair in how I divide the estate?
Stephan Shipe:
So this is a tough question because it has a lot to do with, what are you trying to maximize, what is the goal of gifting in your mind? And so to get too far outside of the financial realm and start getting into the family side of things. But it really does come down to your values. What is the goal that you’re trying to maximize?
And you want to be really careful because when you look at life decisions, that can go a couple different ways. Were those good life decisions and they’re happy and they were good financially, but maybe they’re just in a career that doesn’t have a large income or they just need more financial help, or were these bad life decisions, as in they weren’t good with money, so now you’re hoping to give them money to help them out of these bad situations.
If it’s the second option there, I’d be very careful, and I’ve said this before and it’s a really good line to live by. When it comes to gifting, any gift that you give is just an amplification of financial behavior. So if you are looking at gifting to your kids, regardless of their financial situations, you have to look at their history with money and their relationship with money. And if it’s not a good relationship with money, giving them more money is not going to make that relationship better. It’s only going to amplify.
So that’s first, take a step back and really look at what is their history with money, what are you doing with it, and then taking a further step back and saying, what is your role in all this? I think sometimes it’s really easy to get caught up in the tax benefits of gifting and the benefits that you see because you have done well financially to a point where you have money to gift. And it’s easy to project that onto the kids to say, obviously if I was your age and I knew that I should invest it this way, then I would’ve millions and millions of dollars more because of compound interest and all these things that you’re excited about.
And many of our clients are excited about the compound interest idea of starting early investing. But you have to be careful and realize that not everyone’s going to be like you and have that same mentality and that same relationship with money.
So taking a step back and saying, what is your goal with gifting? Not tax purposes, not your own estate purposes. What are you trying to promote? What type of values are you trying to promote? What type of legacy do you want to give? And then use that as the guiding force to say, well, now how do I gift to my kids who are in very different financial situations?
Because that starts to answer the question of, is the goal to set them up equally financially or is it to have them end up in the same place? What I mean by that is, and we hear this a lot where someone says, you know, I have one child who’s doing fantastic. They have a great career, they’re great with their money, they’re doing great with everything. So I really don’t feel like we need to help them very much, so we’re not going to gift to them as much.
But then I have my other child over here who really does need help financially. They’re having trouble paying their bills. Kids need help paying for school. They have a car that’s broken down, they have all these things and say, well, we need to push more money in that direction so that they can both get to the same spot.
And I think that’s a dangerous road to walk down because you end up in a situation where whenever you start gifting unevenly, you’re immediately going to cause animosity around the family and that whole family harmony aspect is going to start being tested. And there are ways to handle that.
And a lot of it starts with those values. Stepping back and making sure everyone is aware of what is the intent of gifting, what is the intent of your estate, and making sure everyone’s on the same page and then looking at it. Maybe someone needs more present value gifts and someone doesn’t need a gift now, but they can still get their value later.
And the example I just gave sounds like it’d be similar in your situation. Maybe it’s one of the scenarios where the child who doesn’t need much of the income now would just have a larger estate value later. And the child that needs more of the help now can get more of that help now. But maybe the estate value they receive is a little less. Or the types of things they receive in the estate is less.
And sometimes that’s a great conversation to have with the kids of where do they see their own financial priorities? Where are the troubles that they’re running into? So you can work with them and say, maybe the child says it’s not a big deal, right? I don’t need income right now, so it’s not a big deal. Just throw that in and I get a larger estate later on. And the other one says, what I prioritize now is income today for family or for school or anything.
And it’s not to say that you have to end up in these situations where one family is doing significantly better than the others. Sometimes they’re both doing great, they’re just at different income levels, or they live in different areas, different high cost of living areas. So they require a different gifting strategy and a different legacy strategy for you to be able to put into place.
These are great questions, great opportunities. If it ever gets to the point where you feel that you need to have maybe a little heavier hand in how gifts are being spent or how wealth is being distributed, there are plenty of ways to get into trusts where you have a lot more discretion over what those distributions look like—where distributions can only be used for education or distributions can only be used for living expenses—and that way you have a little bit more control over how that wealth is being spent, whether it’s now or in the future.
Advisor Red Flag of the Week: “We Can Make Your Stock Options Tax-Free”
Stephan Shipe:
And now it’s time for our rotating special segment: Advisor Red Flags.
This is where we’re going to call out some sketchy financial advice or practices to avoid. And the one that I’ve seen lately is: “We can make your options tax-free.”
Any time an advisor promises they can eliminate taxes on your stock options or retirement, that’s your cue to walk away.
There’s no free lunch in these scenarios. There are legitimate strategies out there—a lot of them we talked about today, which is a great way to incorporate this in here: early exercise, strategically exercising your options, holding time periods, 83(b) elections, 10b5-1 plans as well. So you’re really structuring the way you’re selling out of shares that you already own.
But these are only tools to manage the taxes. They’re not going to make your taxes disappear. And that is generally the case for many strategies out there—whether it’s options or anything else. So you want to watch out for any type of tax-free outcome that doesn’t come with a clear explanation of the risks.
We see this a lot too with different types of alternative investments that say, “We can give you all this income that’s tax-free.” But what you don’t realize is the risk of that investment is so high—that’s the reason it’s being incentivized with some sort of tax credits or anything else.
So you start to see mentions of offshore trusts or advanced tax shelters. It starts to feel sketchy. When anything starts sounding a little shady out there, it probably is.
And they’re starting to ignore things like alternative minimum tax, different risks—especially when it comes to ISOs, these options.
So the bottom line with any of this: anytime you’re in a situation where it sounds too good to be true, it probably is.
Sophisticated strategies don’t have to be secret. It’s just smart tax planning within the rules that are out there—and working with somebody who’s familiar with those situations, not someone trying to promise you the entire world of no taxes.
Closing
Stephan Shipe:
Thanks for listening. We’ll see you next week.
Hey, this is Stephan Shipe. Thanks for tuning in to the Scholar Advising Podcast. If you have a question you’d like us to tackle on a future episode, share it with us at scholarfinancialadvising.com/podcast. We’d love to hear from you. Until next time.
Disclosure
Scholar Advising is an independent, fee-only financial advisory firm focused on providing hourly financial advice. The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice.
The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your financial situation, objectives, and risk tolerance. Thanks for listening!