What is the role of stock options in negotiating a divorce settlement? Far from being an academic question, the answer can actually determine the ownership of hundreds of thousands of dollars generated by the sale of appreciated stock acquired through company stock options. By specifying in the divorce settlement exactly how stock options will be treated—even if no such stock options exist at the time of divorce—divorcing spouses can proactively minimize future problems.
When it comes to complex compensation packages, the importance of understanding the mechanics, purpose and nature of stock options should not be overlooked. The ability of divorcing couples and their advisors to properly determine the role a stock option plays is pivotal in both the division of marital assets and as a potential mechanism for calculating future support.
Unfortunately, stock options often go unnoticed during settlement negotiations. One reason is the nature of stock options themselves. Stock options give an employee the right to buy company stock in the future at today’s prices. Typically, an employee will have up to 10 years to exercise this right once the vesting period has expired. The first potential pitfall is identifying if any options exist. The second is determining if they have any value. Thus, stock options can be easily overlooked as either an asset or a potential source of income at the time of divorce.
Once the parties have an understanding of the stock options, the next question is how the options should be treated in the divorce settlement. Indeed, two Massachusetts court opinions make it clear what a difficult question this is—and exactly how much is at stake.
The two cases offer guidance from two different perspectives on how stock options should be handled in divorce. In one case, stock options are considered a marital asset to be divided at the time of divorce. In the other, the exercise and sale of the options after the divorce are viewed as income and are subject to alimony. This seemingly technical difference between one approach and the other can add up to hundreds of thousands of dollars.
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