Businesses in the technology sector often offer non-cash benefits and incentives to employees. Particularly prominent are stock options and as such, you may be wondering what the true cost of divorce might look like.
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, 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 Divisions in Divorce
In dividing stock options, you must first answer two questions:
- Are the stock options community property?
- Have the options vested?
Washington is considered a community property state. 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.
What Type of Employee Stock Plans Can Be Divided?
Not all employee compensation plans are treated the same during a divorce. Depending on the employer and compensation package, marital assets may include stock options, restricted stock units (RSUs), employee stock purchase plans (ESPs), performance shares, or other equity-based compensation. Determining whether these benefits are separate or community property often depends on when they were earned, vested, or granted.
Factors That Can Affect Stock Division
Dividing employee stock plans can involve several legal and financial considerations, including:
- Whether the stock has vested
- The date the stock was granted
- The date of separation
- Community versus separate property laws
- Tax implications when shares are exercised or sold
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.
Breakdown of a Time-Weighted Divorce
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.
Protecting Your Financial Interests During Divorce
Employee stock plans can represent a significant portion of a family’s assets. Property valuing and diving these benefits often requires reviewing employment agreements, vesting schedules, and financial records. Working with an experienced divorce attorney can help ensure that stock-based compensation is accurately evaluated as part of the overall property division process.
Questions About Dividing Employee Stock Plans?
Stock options and other equity compensation can be among the most valuable, and most complex, assets in a divorce. Whether you have questions about vested or unvested stock, community property rules, or how these assets may affect your financial future, the divorce attorneys at S.L. Pitts PC can help you understand your options. Schedule a consultation to discuss your situation and protect your interests throughout the divorce process.