Stock options and alimony

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There are several other time rule formulas for other types of options, and the courts have wide discretion in deciding which formula if any to use, and how to divide the options. Generally speaking, the longer the time between the date of separation and the date the options vest, the smaller the overall percentage of options that will be considered community property. However, if the options vested several years after the date of separation, then a much smaller percentage would be considered community property. After application of either time rule, the couple will know how many options each are entitled to.

The next step then would be to figure out how to distribute the options, or their value. Here are a few of the most common solutions:.

This article covers ways California couples can divide stock options in divorce.

This area of family law can be quite complex. If you have questions about the division of stock options you should contact an experienced family law attorney for advice. We've got a wealth of information in our section on California Property Division in Divorce. Notes 1. Marriage of Hug Cal. Marriage of Nelson Cal. The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site.

What You Need to Know About Dividing Stock Options in Divorce

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What You Need to Know About Dividing Stock Options in Divorce

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This article covers ways California couples can divide stock options in divorce. Separate Property Separate property is not part of the martial estate, which means the spouse that owns the separate property, owns it separately from their spouse not jointly and gets to keep it after the divorce. In California, separate property includes all property that is acquired by either spouse: before the marriage by gift or inheritance, or after the date of separation see below.

Dividing the Options So how does the court determine what portion of the options belong to the non-employee spouse? The Hug formula The Hug formula is used in cases where the options were primarily intended to attract the employee to the job and reward past services. Distributing the options or their value After application of either time rule, the couple will know how many options each are entitled to.

Here are a few of the most common solutions: The non-employee spouse may give up the rights to the stock options in exchange for some other asset or cash this will require an agreement between the spouses as to what the options are worth - for public companies, stock values are public and can form the basis of your agreement, but for private companies, this might be a little more difficult to determine - the company may have an internal valuation that can provide a good estimate.

Talk to a Lawyer Need a lawyer? From a divorce perspective, stock options and RSUs are quite similar. Each form of compensation has a vesting period, and each pays an employee as taxable W-2 income. Indeed, in some ways, RSUs are significantly easier to account for in a divorce; unlike stock options, that a spouse can save and stockpile over time, most RSUs automatically pay out on a fixed schedule.

Stock Options as Income

However, RSUs also typically have a shorter lifespan than stock options, making them more similar, in some ways, to a cash bonuses than a stock option, which looks more like a long-term investment. In any event, nothing in the Massachusetts case law suggests that RSUs should be treated differently than stock options in a divorce case, given the generally similar purpose, timing, conditions and tax treatment of payouts from each instrument. Stock options and RSUs are not the only forms of equity compensation out there for high-earning employees. Corporate employees receive a whole alphabet soup of compensation instruments :.

While each form of equity compensation includes different details and triggers, most are treated in a similar fashion to stock options and RSUs in a divorce, subject to various exceptions. The time-delayed nature of stock options and RSUs make them a complex subject in divorce cases. For more than a decade, one question has swirled around unvested stock options and RSUs: should these instruments be treated as assets, subject to division, or as a source of future income, from which alimony or child support can be paid.

The outcome of this question is important. If the unvested RSU is treated as a source of future income, the other spouse is likely entitled to substantially smaller share i. The Hoegen decision addresses whether RSUs should be treated as income in a modification action. What about at the time of the divorce? Should unvested RSUs paid to a spouse during the marriage be treated as assets, subject to division, or income from which future alimony or child support can be paid?

Massachusetts courts have struggled with this thorny question for more than a decade. In , the Supreme Judicial partially answered these questions in Baccanti v. Morton In Baccanti , the Court held that unvested stock options can be divided as assets in a divorce. However, the SJC acknowledged that it might be unfair to treat unvested stock options received just before a divorce became final as assets, where the employee spouse would need to work an additional span of years before he or she could collect on the unvested stock options. The Baccanti formula involves the type of math equation that is relatively easy to perform, but can be hard to explain in plain English.

If the stock options are a quarter of the way towards vesting at the time of the divorce, then a quarter of the stock options should be divided. The Table Below illustrates the Baccanti formula at work. In the Table, we see three stock awards, each with a vesting period of 5 years:. Stock Award 1 was awarded 1 year ago, meaning that it will be another 4 years before the stock vest. Stock Award 2 shares was awarded 3 year ago, meaning that it will be another 2 years before the stock vest.

Stock Award 3 shares was awarded 4 years ago, meaning that it will be another 1 year before the stock vest.

Under the Baccanti formula, the percentage of stock shown in the Table that will be divided as an asset is as follows:. Thus, out of total shares, shares will be divided as an asset. When using the form in Excel, update the columns in RED to reflect the grant date, vest date, date of divorce and total shares to match your case.

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NOTE : To use the form: 1. Calculate up to 5 Stock Awards at once. Although the Wooters Court clearly held that stock options and presumably RSUs can be treated as a source of income for alimony purposes, it is important to recognize that Wooters dealt with stock options that were exercised by the former husband in , more than eight years after the parties were divorced in In other words, the stock monies received by the Husband in Wooters came many years after the divorce.

In Ludwig v.

Lamee-Ludwig , the Appeals Court delivered a lucid, well written judicial opinion that combines the reasoning of Baccanti and Wooters to provide a clear path forward for divorce cases involving stock options and RSUs in Massachusetts. The Court affirmed the lower court judgment entered by Hon. John D. Casey of the Norfolk Probate and Family Court in all respects. The Ludwig decision establishes several clear guideposts for courts review RSUs in divorces moving forward:.

A Common Stock Option Hypothetical

I would be remiss if I did not include a final note on the unique hearing that led to the decision in Ludwig v. According to the Appeals Court, the parties entered a Separation Agreement in which they agreed to all issues in their divorce except for two issues:. By arguing the issues this way, the parties saved a great deal of time and legal fees compared to the delay and cost of a full-blown trial. However, the Appeals Court decision illustrates some of the risks involved in foregoing the formalities of trial.

The sole reason he gives is that the judge did not make factual findings under G.

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