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What happens to stock options in divorce

The Dow Jones average has risen from about 20,000 to 22,000 so far this year. So there is no better time to consider the extraordinary value of employee stock options, and what happens to them in divorce.

Today, nearly half of companies offer stock option plans covering all or most of their employees. A benefit that was once used to lure in top executives is now available to millions of us.

The business of valuation

As California is a community property state, stock options find themselves on the dividing block in many divorces. Division requires astute knowledge of valuing the options and tax considerations.

Valuing becomes more complex when restricted stock has been granted but not yet vested, when the market is volatile, the business is volatile or the future is uncertain for one reason or another. Sometimes valuation is difficult to ascertain because the stock does not trade publicly. An accurate valuation must still be placed on the options.

Two approaches to distribution

Stock options can be distributed using one of two methodologies:

  • Deferred distribution upon exercise of options (also known as constructive trust)
  • Present valuation with off-set against other assets

Of these two, deferred distribution is the method most often used.

In dividing stock options, it is important that neither party has crossed insider trading lines. Also, distribution may be affected by any sudden change in employment status, such as termination or resignation.

Dealing with complexity

Stock options are one of the most challenging assets in property division precisely because they are options. It is often advised to exercise options sooner, rather than later, to avoid value loss.

A successful divorce lawyer brings skills and experience to division of stock options and other employment benefits. At Niven & Niven, we are available to divide these assets in the way that is most advantageous to you.

 

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