In a divorce, many assets are relatively easy to divide. But stock options can be difficult to valuate and divide, particularly if they have not yet vested. In Washington and California, formulas address how to divide employee stock option plans. Below are the basics of how such assets will be treated in divorce.
Basics of stock option division in divorce
In dividing stock options, you must first answer two questions:
- Are the stock options community property?
- Have the options vested?
Both California and Washington are community property states. This means that all property of the marriage is generally divided equally in divorce, regardless of who earned or purchased the assets, so long as it was accrued after the marriage began and before separation. Community property includes stock options.
A vested option is one in which the employee now has the right to purchase the stock.
Time-weighted formula for division
An employee’s interest in an incentive stock plan is typically divided based on a time-weighted formula. This formula applies to stock option plans, stock warrants, restricted stock, and any other employee stock plan. The formula will divide the option based on when the option will vest and the date of separation.
An example may best help to illustrate this formula.
You have a stock option that will vest in five years. You divorce a year after receiving the option, which is four years prior to its vesting.
The stock is subject to division in the divorce. Under the time-weighted formula:
- 1/5 of your option is community property (because you were married for a year after receiving the option).
- 4/5 is your separate property (based on the date of separation). Accordingly, you will receive 4/5 of the options as your separate property.
- Assuming the marital community is split 50/50, you will receive half of the 1/5 community share of the options as well.
- In total, you will receive 9/10 of the options.
While the above example is straightforward, complications can easily arise. For example, the date of separation may be contested, or it may be difficult to quantify the value of an option that will not vest for some time. For questions on how to divide stock options and other employee stock plans, contact an experienced divorce lawyer.