Divorce is complex in every aspect, including people’s finances. One area that often raises questions is the treatment of stock options. California follows community property laws, which inform the answer to this question and are essential to understand to help ensure a fair resolution for both parties in a divorce.
Stock options
Stock options are contracts between employees and a company where employees can purchase stock at a predetermined price within a specific time. This is often offered as part of an employee’s compensation package. However, the division of stock options during a divorce can be complicated.
Community property laws
California follows community property laws, which means that any assets a spouse acquires during the marriage are community property (or marital property) as opposed to separate property and are subject to equal division during a divorce.
In the case of separate property, the opposite is true. Assets acquired before marriage or through inheritance or gifts given explicitly to that one person are typically considered separate property by law.
How much is your stock worth?
One reason the division of stock options is complex is that the parties must determine their value, which is not simply the market price at the time of the divorce.
Other factors that go into calculating the value of stock options are the exercise price, vesting schedule and the potential future value of that stock.
Division of stock options
Common methods for dividing stock options include:
- Coverture fraction, often used to determine the community’s interest in stock options, considers the time the employee was married versus the total time it took for the stock options to vest.
- In some cases, a deferred distribution is used, where the non-employee spouse can receive a percentage of the stock options when those options are exercised. In this method, the purchasing spouse, the employee, retains control over the options until they are exercised.
- Buying out is another option: one spouse buys out the other spouse’s interest in the stock options. This can be a straightforward process if the parties agree on the value.
The division of stock options during a divorce is not always easy, and in California, spouses must understand how the laws treat stock options within the marriage. Working with a knowledgeable family law attorney who understands the intricacies of community property laws in California is essential.
With proper guidance, you can protect your interests and achieve a fair outcome in your divorce. If you have questions about your specific situation, contact our offices.
