Strategic Issues in Valuing and Dividing Employee Stock Options in Divorce
In recent years, employers have increasingly chosen to compensate executives and employees with stock options.
This means that family law attorneys have to focus more on understanding how to value and transfer stock options as marital property in a divorce. California law states that all assets acquired during the marriage are considered community property; this includes any "earned" stock options.
California law states that all assets acquired during the marriage are considered community property; this includes any "earned" stock options.
Courts typically use a formula called a "time rule" to determine the stock option's value. This is pursuant to a 1977 case called "In re Marriage of Hug" 68 Cal.App.3d 515, 137 Cal. Rptr. 318.
Here is the "time rule" formula:
(Date of Grant to Date of Separation) ÷ (Date of Grant to Date of Vesting)(# of Shares Exercisable) = Community Property Shares
In a second case, In re Marriage of Hug (1984) 154 Cal.App.3d 780, 201 Cal. Rptr. 676, the "time rule" changed slightly. Under this case, either the date of employment or the date of the stock option grant can be used as the valuation date.
When exercised, stock options are taxed. Those taxes are taken into consideration when valuing the stock option. The difference between market value at the time of exercise and the exercise price is considered taxable income. When a capital gain or loss is recognized at the stock sale, those options will be taxed.
Stock options are usually not transferable and trying to do so may be a risk for the non-employee spouse. The employee spouse needs to simultaneously give notice and exercise the options upon request.
If the options are contingent on employment, the non-employee spouse is also at risk if the employee spouse quits or is terminated and loses their stock options.
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