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I’m Getting a Divorce: What Happens to My Stock Options?

I’m Getting a Divorce: What Happens to My Stock Options?

What’s mine is yours?

Although the treatment of stock options in divorce cases varies by state, it is important to understand the critical issues and legal trends that will affect how your assets are divided.

Stock options were not considered as assets to be divided in the marital estate until the early 1980s. Since then, different state courts have issued different rulings when it comes to considering stock options as marital assets in the overall property distribution. These courts have also come to different rulings regarding how to dispose of them if they are marital assets. Most courts consider stock options in the overall property distributions, but few have addressed whether these assets are income that can be used for the purpose of child support or alimony.

Main Issues Courts Analyze

According to MyStockOptions.com, Divorce courts usually assess the distribution of stock options in three steps:

  1. Are the options “property” to be distributed in the division of assets (classification)?
  2. What is an appropriate method for determining the value of the property (valuation)?
  3. What is the appropriate distribution of the property between the parties (distribution)?

While there are discernible trends, each state follows its own specific laws and cases. Discuss your state’s statutes with your divorce attorney and financial advisor to determine how the court is likely to treat your stock options.

Options As Property

There are two types of principles which determine how your state will categorize your stock options. These principles are “community property” or “equitable distribution.” Regardless of your state’s principles, the court must first make a preliminary determination of whether your stock options are considered “property.” Most states will define any assets acquired by either spouse after they have married as marital property. In states with the community property principle, each spouse is entitled to 50% of the stock options earned during the marriage. In most other states that do not use community property principles, any property acquired during marriage—including stock options—is subject to equitable division by the divorce courts. Unlike most states, California (a community property state) treats as separate property any income earned and assets acquired after a physical separation of spouses who do not intend to continue their marriage.

Divorce courts will typically adopt  either the “mechanical approach” or the “analytic approach” to determine whether an asset is property or not. The “mechanical approach” provides that future benefits are marital property if the underlying claim occurred during the marriage. Under this approach, timing is very important: if a grant of stock options occurred during your marriage, the court would find it marital property.

The second method of classification is the “analytic approach,” which seems to be the most popular one in the United States. Under this approach, the nature of the claim, its component parts, and the character of the settlement are all analyzed to determine whether the award is marital property, separate property, or both, according to MyStockOptions.com.

The division of stock options in a divorce is a complicated process which varies from state to state. If you’re going through a divorce and need guidance on this process, Stock Connections  can help. Contact us today.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today!

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