Stock Options and Divorce
More and more Connecticut employees are receiving stock options from their employers. Stock options can have significant value and often play an important role in divorces — especially high net worth divorces.
But how do you value these stock options? How do you divide and transfer them?
Read on to learn more.
Background on Stock Options
Many publicly traded businesses reward valuable employees by them giving stock options or restricted stock. With stock options, the employee has the right to buy stock in the employer at a pre-set price (called the “strike price”) usually following a waiting period (called the “vesting period”). By using a vesting period, the employer encourages top employees to stay with the company.
Most stock option vesting periods span about three to five years. After the options vest, they are “earned.” That said, the employee still needs to decide whether to exercise, aka purchase, the stock. If the market price for the stock is higher than the strike price, the employee can exercise the vested options and effectively own company stock of the company at a discounted rate. Or, the employee can make money by exercising the vested options and then selling the stock at the higher market price.
Background on Restricted Stock
Restricted stock refers to company shares that are granted at no cost to employees. Restricted stock is not transferable until certain conditions, such as employment by the company for a specified period of time, have been met. In the case of restricted stock, the employee may receive dividend income and an ownership stake in the business.
Are Stock Options Income, Salary, or Property in Connecticut Divorces?
Connecticut treats stock options as property. So, stock options fall under the property division rules rather than the alimony or child support rules.
Can Stock Options Be Divided by a Connecticut Divorce Court?
Many people are under the misconception that Connecticut courts will not divide stock options. Connecticut is an “equitable distribution” and an “all property” state. “Equitable” does not mean equal, or even half, but rather what the Superior Court considers fair. “All property” means that the courts have jurisdiction over all the property that both spouses have. Stock options earned during the marriage are included in the definition of property that Connecticut courts can divide. More, courts can even divide some stock options that are not yet vested.
Unvested Stock Options Vs. Vested Stock Options
The exception to the rule that Connecticut courts can divide all property owned by either spouse is when their ownership is considered an “expectancy.” Generally speaking, a spouse’s property rights fall into the “expectancy” exception when he or she doesn’t have a clear right to or ownership of the property. In other words, the spouse’s ownership is contingent on something happening.
Courts can divide unvested stock options as well as vested stock options. The key is whether the unvested option is contingent on the employee providing additional future services. If future services are required, then the stock options were not earned during the marriage. Therefore, the court cannot divide them.
How Do You Value Stock Options in Divorce?
Valuing stock options is often difficult because they are usually subject to restrictions or the benefits accrue over a number of years. They may be forfeited if employment is terminated or become worthless if the employer goes out of business.
There are two basic ways to value stock options: intrinsic value and Black-Scholes method. To determine the intrinsic value you subtract the cost of the stock option from the current market value of the stock. The Black-Scholes method is a more complicated actuarial method.
How Do You Divide Stock Options in Divorce?
Most employers do not allow employee benefits — including stock options — to be transferred to a non-employee like a spouse. As a practical matter, it can be easier to get the non-employee spouse owner his or her share of the value of the stock options via other assets. Alternatively, experienced divorce lawyers make complex arrangements that are then clearly detailed in the divorce agreement. You also need to consider the tax impact of exercising stock options. For example, if all the options are in the employee’s name, that person will be responsible for the taxes.
Finding Stock Options
Stock options and restricted stock will not appear on tax returns or paystubs unless and until the options are actually exercised and the restricted stock has vested. They can easily be overlooked or even deliberately not disclosed. The discovery process gives divorce lawyers tools to located stock options.
The Comprehensive Connecticut Property Division Guide
How to divide property is one of the most important issues in divorces. And, it’s one of the most confusing. There are no set formulas or rules on how property will be divided. The good news is that creates tremendous flexibility for experienced divorce attorneys to craft an individualized approach. In order to prepare to make solid and informed decisions, you need to understand how property division works. Our Comprehensive Connecticut Property Division Guide tells you everything you need to know about property division in Connecticut.
For more information about Connecticut divorce and family law, check out our Divorce Information and Facts. If you have questions or want to learn more about how our team of divorce attorneys can help you with your divorce or Post Judgment issue, please contact us here.