Businesses in the Seattle and Puget Sound technology sector often offer non-cash benefits and incentives to employees. Particularly prominent are stock options, restricted stock units (RSUs), and equity compensation, and as such, you may be wondering what the true financial outcome or cost of divorce might look like.
In a marital dissolution, many assets are relatively easy to divide. But stock options and unvested RSUs can be difficult to valuate and divide, particularly if they have not yet vested or are subject to complex corporate schedules. In Washington State, judicial case law (such as In re Marriage of Short) and formulas address how to divide employee stock option plans. Below are the basics of how such tech equity assets will be treated in a Washington divorce.
Basics of Stock Option Divisions in Divorce
In dividing stock options and tech compensation, you must first answer two questions:
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Are the stock options community property under Washington law?
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Have the options vested?
Washington is considered a community property state. This means that all property of the marriage is generally divided equitably (which often means equally) in divorce, regardless of who earned or purchased the assets, so long as it was accrued after the marriage began and before the date of legal separation. Community property includes stock options and executive equity grants. A vested option is one in which the employee now has the right to purchase or exercise the stock.
What Type of Employee Stock Plans Can Be Divided?
Not all employee compensation plans are treated the same during a Seattle divorce. Depending on the employer (such as major Seattle tech companies like Microsoft, Amazon, Meta, or Google) and compensation package, marital assets may include stock options, restricted stock units (RSUs), employee stock purchase plans (ESPPs), 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 relative to your marriage and separation dates.
Factors That Can Affect Stock Division
Dividing employee stock plans can involve several legal and financial considerations under Washington family law, including:
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Whether the stock or RSU tranche has vested
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The date the stock or equity incentive was granted
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The official legal date of separation
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Community versus separate property laws under RCW 26.16
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Tax implications when shares are exercised, transferred, or sold
Time-Weighted Formula for Division (The Short Analysis)
An employee’s interest in an incentive stock plan is typically divided based on a time-weighted formula established by the Washington Supreme Court in the landmark Short decision. This formula applies to stock option plans, stock warrants, restricted stock, RSUs, and any other employee stock plan. The formula will divide the option based on when the option will vest and the date of separation to determine community versus separate fractions. An example may best help to illustrate this formula.
Breakdown of a Time-Weighted Divorce Allocation
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 Washington time-weighted formula:
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1/5 of your option is community property (because you were married for a year after receiving the option).
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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.
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Assuming the marital community is split 50/50 by a King County judge, you will receive half of the 1/5 community share of the options as well.
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In total, you will receive 9/10 of the options while your ex-spouse receives 1/10.
Protecting Your Financial Interests During Divorce
Employee stock plans can represent a significant portion of a family’s wealth in Western Washington. Properly valuing and dividing these benefits often requires reviewing employment agreements, vesting schedules, offer letters, and financial records. Working with an experienced Seattle divorce attorney can help ensure that stock-based compensation is accurately evaluated as part of the overall property division process and equitable settlement negotiations.
Questions About Dividing Employee Stock Plans?
Stock options and other equity compensation can be among the most valuable, and most complex, assets in a Washington State divorce. Whether you have questions about vested or unvested stock, community property rules, tax consequences, or how these assets may affect your financial future, the Seattle divorce attorneys at S.L. Pitts PC can help you understand your options. Schedule a consultation with our legal team to discuss your situation and protect your interests throughout the divorce process.