Divorce Distribution Of Stock Options And Grants

Some corporations compensate their employees with stock options and/or stock grants. They are different and in the event of a divorce they must be reviewed as to restrictions, maturity, reason for the award, timing of the award and value. Once all of that has been done the question of how to distribute the martial portion can be analyzed. This is not simple and can only be briefly and summarily explained in this blog.

Both stock options and grants are a form of compensation whether now or in the future for an employee. They could be given for past performance as well as for future performance. They can be given (and often are) as a form of maintaining the employment of the recipient due to restrictions of usage. They can be given as an incentive to accept employment. Therefore, besides knowing whether the award was made during the marriage or after commencement of the divorce it is important to know the reason for the award.

Generally, awards that are received during the marriage are marital property. Therefore, knowing the date and amount of the award and conditions of the award are all critical information. Stock options and stock grants are not the same.

Generally, a stock option does not require any spending of money by the recipient when the options are received. Instead, the recipient has the “option” after a date in the future set by the employer to buy the stock or to choose not to purchase. Stock options when issued are generally for a share price that is less than the current market price. If in the future at the time that the stock can be “exercised” (purchased) the stock is trading higher than the purchase price, than most employees will exercise the option and purchase and either hold the stock or then sell it at the current (higher) value and earn money on the difference between the purchase price and the sales price. If the stock is trading for less than the purchase price, than the employee does not purchase because they would lose money and the phrase used is that the stock “is underwater”. If the stock is “underwater”, unless the employee thinks the stock will rebound, it is a risky purchase. Stock options can also have an expiration date and if not exercised will no longer be usable by the employee.

Stock grants are different than options because the stock is given at the time of the award to the employee without any purchase requirement. Whatever the stock value may be now or in the future does not affect the receipt of the stock, rather it only changes the value of the grant. Either way the employee has received a benefit. However, the company may place a restriction on the grant and not permit the sale of the shares until a specific date in the future…perhaps a year or longer. There may be limitations as to how many shares can be sold at one time. There may also be a requirement of continued employment.

Spouses during a complex divorce case involving these issues should have experienced matrimonial attorneys and/or accountants because there are many issues that will affect how, when and the dollar amount or percentage of the equitable distribution. Additionally, there are significant tax issues that arise when stock options are exercised or stock grants are sold or will be sold if in the future.

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