Alternative forms of compensation, such as employee stock options are complex and present challenges in a divorce.

An employee stock option is the right of an employee to buy a specific number of shares of stock in the employer-corporation at a specific price (strike price, grant price, or exercise price) at a specified time in the future.  Usually, there are restrictions and conditions on the employee’s right to exercise options, such as maintaining employment with the company for a required number of years.   The employer may also allow various portions of options to vest at different stages.

When the required conditions are met, the option may be exercised (i.e. the employee may buy the stock).

There are two types of employee stock options (qualified and nonqualified).  Whether stock options are qualified or unqualified relate to the tax treatment of the options to the employee. 

The biggest question regarding employee stock options is determining how the options factor into the division of property in a divorce.  The answer to this question is complex depending on a variety of factors. 

When stock options are present in a divorce:

  • Your divorce lawyer will obtain specific information regarding the stock options, including, but not limited to, complete plan documents, grant award statements, etc.
  • You’ll need to value the option(s) to determine the martial portion and non-marital portion of each.
  • It’s important to be cognizant of the tax implications for an award of stock options in a divorce.  The value of the options can’t be realized without incurring income taxes.   This is especially true if you are the option-holder, as the tax burden is on the option holder and can’t be transferred to the nonemployee spouse. 
  • A determination must be made about how the nonemployee spouse will receive the value of the stock options, since they are generally not assignable. The nonemployee spouse could receive an offset of other equivalent assets, if available, or adopt a “deferred distribution approach” which requires the spouses to divide the martial portion of the option in the future if and when they are exercised.
  • Consideration must be given as to whether employee stock options are considered income or property for purposes of divorce.

Legal knowledge, the right experts, and experience matter when dividing stock options in a divorce.  Contact our office to schedule a consultation to discover how our legal team at Koenig │Dunne can protect your financial estate and your future.

Angela Lennon

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