Focused Divorce And Family Law Representation To Help You Through Life’s Transitions

Photo of attorneys Ullmann and Mikulka

How to handle stock options in a divorce

On Behalf of | Apr 19, 2021 | Asset Divison |

During your marriage, chances are that you lacked few material things, particularly if your spouse was a high-powered, well-compensated executive. In fact, you may not even realize the extent of your spouse’s earnings since it is likely a portion of his or her compensation came in the form of stock options and restricted stock plans. This becomes very important now that you are heading toward divorce. 

Dividing these complex holdings is not always easy, and it is common for the non-executive spouse to obtain less than a fair share due to a lack of understanding of the assets. If your spouse’s income includes complicated holdings, you would be wise to learn quickly about how they work and how you can get what you deserve in your divorce settlement or court order. 

What are stock options? 

Stock options are a common way for businesses to motivate and reward executives, especially when the economy makes it challenging to compensate with cash. Your spouse’s New Jersey employer may have paid your spouse with stock options, which allow your spouse the chance to purchase stocks at a future time but at the price of the stocks when his employer awarded them.  

This form of compensation has its drawbacks. For example, the employee may not exercise the stock option until the end of the vesting period, which is usually between one and five years. However, stock options can also be quite lucrative if the company does well and stock prices rise. A savvy executive may exercise stock options at this time, potentially paying only a few hundred dollars for stocks worth many thousands.  

Dividing stock options 

Oftenthe employee may not transfer his or her stock options. If this is the case, your spouse can place the stock options in a trust for your benefit. It is important that the language in your divorce settlement is clear and precise for the protection of the assets in that trust. Additionally, your spouse may want to consider the tax ramifications associated with the sale of your share of the stocks. The employee who earned the stock options is typically responsible for paying any taxes. 

One challenge you may face is discovering whether stock options or other non-cash incentives are part of your spouse’s income. These may not show up on his or her paycheck or tax returns. You may have to do some deep digging to determine if your spouse’s employer compensates with stock options and what part of those benefits should be on the table during your divorce.