The Division of Stock Options at Divorce

July 8, 2012

Often in San Diego, one or both spouses are awarded stock options from their employer. A stock option gives the employee a right to purchase stock in the company at a later time and for a specified price. All property acquired by either spouse during marriage is presumed to be community property. If a stock option is awarded and vests during the marriage, it is community property and each spouse is entitled to a one-half distribution of the asset. What if a stock option is awarded during marriage but vest after the date of separation? The community still has an interest in the stock option to the extent it was acquired during the marriage as earnings of the spouse. In determining the community portion of the stock option, the court will examine the primary intent of the employer in awarding the stock options.

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If the court determines that the stock option was awarded primarily to reward the spouse for past services, the court will use the Marriage of Hug formula to calculate the community's interest. In this case, the stock options are a form of deferred compensation and thus the community property earnings of the spouse and subject to division upon divorce. The court will multiply the value of the stock by a fraction. The fraction represents the total number of years the spouse worked until exercise of the stock option and the total number of those years in which he or she was married. Thus, the community's interest will be proportional to the number of years the parties were married between the beginning of employment and the exercise of the option. Each spouse will be awarded a one-half interest of the community portion, and the employee-spouse will also be awarded the separate property portion.

If the court determines that the stock option was awarded primarily to induce the employee to work for the company or stay longer, the court will use the Marriage of Nelson formula to calculate the community's interest. Using this formula, the court will again multiply the value of the stock option by a fraction. This time, the fraction represents the total number of years between the award and the exercise of the option and the number of those years during which the parties were married. Thus, the community's interest will be proportional to the number of years the parties were married between the award of the stock option and the exercise of the option. Again, each spouse will be awarded a one-half interest of the community portion, and the employee-spouse will also be awarded the separate property portion.

Please contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child custody and visitation. Nancy J. Bickford is the only attorney in San Diego County representing clients in divorces, who is a Certified Family Law Specialist (CFLS) and who is actively licensed as a Certified Public Accountant (CPA). Don't settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.