What Happens to My Stocks During a Divorce?
Throughout divorce proceedings, there are multiple things that need to be divided, especially if it is community property between you and your spouse. Assets will normally need to be divided equally. One asset to consider is your stock that is earned through employment.
So how do you divide your stock options that were acquired during the marriage?
First off, stock options from your employers give an employee the right to purchase stock at a later time and for the price specified in the option (“strike” price). But these stocks can be vested or unvested. Vesting is when your company/employer gives you full control of the stock without any conditions or stipulations and refers to the transfer of full ownership of a stock. Unvested stocks are when your company/employer sets aside a certain amount of the stock for your use, but you have to meet certain conditions before you have full ownership of the stock.
There are different situations that can arise with stock options. So here are two simple scenarios.
If you receive the stock from your employer and the stock vests while you are married, it is community property. The stock is then divided in half.
If you receive the stock from your employer before marriage or after separation, it is considered separate property and not subject to division.
But, this third scenario is more complicated.
If you receive the stock while you are married, but your employer does not vest the stock before your date of separation from your spouse, it is still considered community property and you may still have to divide it with your spouse. The division is determined by one of several formulas, or “time rules.”
The two most common time rule formulas as the Marriage of Hug formula and the Marriage of Nelson formula. In order to determine which formula to use, courts will determine why the stock options were granted to the employee and use the appropriate rule.
The Hug formula is used where the stocks were primarily intended to attract the employee to the job and reward past services. The formula is as follows:
[(Date of Hire to Date of Separation) / (Date of Hire to Date of Vesting)] x (number of shares exercisable) = Community Property Shares
The Nelson formula is used when the stocks were primarily intended as compensation for future performances and as an incentive to stay in the company. The formula is as follows:
[(Date of Grant to Date of Separation) / (Date of Grant to Date of Vesting)] x (number of shares exercisable) = Community Property Shares
For both formulas, the community property shares would then be divided by half for you and your spouse.
The math looks and sounds complicated, but a general rule of thumb to remember is that the longer the time between the date of separation and the date the options vest, the smaller the overall percentage of stocks that will be considered community property. So, if the stocks vest several years after the date of separation, then only a small percentage of it would be considered community property.
Conclusion
This area of the law can be confusing and have a lot of contingencies. For example, there are other things to consider, such as the fact that stock options are not usually transferable and if the stock options are contingent on employment, the non-employee spouse is at risk if the employee spouse quits or is fired and loses their stock options. Additionally, stock options are taxed.
But, don’t give up. Learn what you are entitled to after you separate. Schedule a free consultation to get started. Contact us at info@cordiallaw.com.