Dividing Stock Options in a California Divorce
How Are Stock Options Treated if You Decide to Dissolve Your Marriage?
The first thing to consider is whether the stock options are vested or
not vested, granted in California they will still be treated as a piece
of property and they need to be appropriately divided.
Basically, stock options are commonly used to attract or retain key employees
with incentives outside of their basic salary structure. Dividing stock
options can be tricky, sometimes we utilize the benefit of a forensic
accountant to help with this process and there are different cases that
talk about the division of stock options. These cases contained within
them certain formulas that we can utilize to divide the stock options.
Our Orange County divorce attorneys start with determining when the stock
options were earned. For instance, if they were earned after the date
of marriage but before the date of separation, they are clearly going
to be treated as community property. But then the question becomes when
are the benefits earned and to determine if a stock option was earned
by an employee sometimes you need to look at their employment contract,
sometimes you might need to depose their boss, sometimes you might need
to look at the letter the employer often writes out with a note of “Congratulations
we are granting you with stock options. Here’s how much they are…”
Looking at it from the point of view of the boss or the person receiving
or another perspective helps us determine when this benefit we were calling
a stock option was in fact earned.
Now you would wonder if it is earned before the date of separation why
is it not clearly community property? Recall what we said: if it’s
earned after the marriage but before the date of separation then it would
be treated as community property.
What if it was earned before the date of separation however the employee
who got the stocks worked for that company before the date of marriage
and therefore earned them before the date of separation. But then again
what does earn mean? Did the employer give the stock option to that employee
in part because of what the employee did before they got married since
they’ve been working for that employer before the date of marriage.
For instance, let’s say it’s a 4-year marriage and “employee”
has worked for “employer” 8 years and then right before the
date of separation, say 6 months before, employer gives stock options
to employee. They were given to the employee before the separation, i.e.
they earned it before the date of separation. Again it depends. We need
to look at the intent of the employer – are they compensating the
employee for work that was done only during the marriage, or are they
compensating in part for the work that was done before the marriage, or
are they also compensating the employee and because sometimes stock options
are given to retain an employee is it a forward looking grant? Then what?
What if you get them after the date of marriage and before the date of
separation but if you read the fine print you determine that it is the
expectation of the employer for employee to work five more years before
they get a dime, before they get to exercise those stock options. Are
the stock options community or separate property because it’s based
on future work you’re going to do as a separated individual? Are
they a mixed asset, a hybrid, with some of it going to be community and
the rest separate property? That’s what we called the “time
About the Time Rule
The time rule is a very basic concept. We often use it for retirement accounts
but it is also applicable to stocks. Imagine a retirement account where
you are firefighter and you worked as a firefighter for the city of Yorba
Linda for 20 years, but you were only married 5 out of 20 years and you’ve
been contributing to your retirement account for 20 years. The time rule
would dictate that the community’s interest in that retirement account
is 5/20. The numerator would be the total number of years during which
you make contributions when you were married, denominator would be the
total number of years you’ve made contribution since you’ve
started that retirement plan. That is a simplified way to look at the
time rule as a way to proportionally divide an asset that has been earned
over different periods of time. Now the difference when it comes to the
retirement account is there is prospective look at it. It is not like
the employer is saying “you must work five more years with us to
be entitled to your retirement account” as opposed to stock options
where sometimes it is based upon future work.
What if you have a stock option earned during the marriage but vets afterwards?
Is that community, separate, or hybrid? Typically, stock options that
are earned during the marriage but vest afterwards are treated like a
deferred compensation plans similarly to certain types of pensions. Usually
an employee is granted the right to buy stock now or in the future at
a fixed price. That’s what a stock option is, you’re being
given the right to own some percentage of the company through a stock
and what the benefit the employer is giving you is that they’re
essentially telling you “we’re going to sell this stock to
you at a discounted price,” there are fixing for you essentially
the price of the stock. Sometimes they give you different awards of stock
starting from now and into the future. You have a choice if you want to
exercise those options you’re essentially saying “I want to
buy into the company this many stocks you guys have awarded me at a discounted
price of x.”
We must then look again at the award. What if the terms of the stock options
are that you have to sell back your stock to the company if you ever leave?
That would change things.
What controls whether the options are separate or community property is
when they were granted and when they vest. Those are the two key factors.
Again, vesting goes typically into the time, effort, labor the employee
is putting into the company. Therefore, if the stocks are fully vested
by the Date of Separation and they were acquired during the marriage that’s
pretty much all community property.
But again, if they vest five years after the date of separation because
you’re required to continue working then it’s possible that
only a proportion of that stock option is community and the rest of it
is separate property.
What if they do not vest at all? There are circumstances under which there
is a minimum number of years of service which you’re required to
put in and you never do. Then it is not a property interest because it
never vested. In that case it becomes like an expectation that never matured.
In cases where you have to work many years for the company for the stocks
to vest, assuming you’re still at the company and you’re still
working but you separate before it’s vested then typically the options
are going to be both community and separate property and we’ll need
to do an apportionment between what is community and what is separate
which would bring us back to the time rule.
Now what if stock options are granted after the date of separation. Those
usually would be the separate property of the recipient even if some of
the reason the employer gave it to them is because of their prior work.
Now we would still look at what the intent of the employer was but in
cases like that where your employer knows you’re going through a
divorce and they’ve given you stocks or granted them to you after
the date of separation and they know what the law requires, they’re
going to come in and probably support the employee and provide that their
intention in giving the stock was to retain the employee for the future
and therefore it is not based upon the work that the employee did before
the date of separation. The issues involved are complicated, which is
why it is important that you consult with our Orange County divorce lawyers
at Moshtael Family Law.
contact us online for a free consultation.