How Do You Value Stock Purchased with a Loan in Divorce?

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Corporate executives often receive stock as part of their compensation package. This can be very lucrative and desirable particularly because of their tax benefits. In a divorce, stock options and stock grants may be considered assets subject to equitable distribution depending on the circumstances. As discussed in prior posts, a key issue is whether and to what extent the rights to the stock have vested or are deemed earned, as the case may be, which can be complicated to determine. Even if the rights have vested, an additional factor that may affect how much a spouse is entitled to get is whether the stock was purchased with a loan.

How Are Stock Options and Stock Grants Treated in Divorce?

A stock option offers the recipient the right, but not necessarily the obligation to buy or sell a stock at an agreed-upon price for a fixed period of time. If the right to the stock vested or was deemed earned during the marriage, it would be considered marital property subject to equitable distribution even if the recipient spouse didn’t receive the stock until after the divorce was filed. The non-recipient spouse is generally entitled to get half of the value as it is considered to be a passive asset.

A stock grant gives a recipient shares of stock in the company. The right to the shares vest over a period of time. The stock is generally considered to be lost if the recipient leaves the company before it vests. In that event, the non-recipient spouse would get half of the amount the recipient earned up until he or she left the company or the date upon which the divorce action is filed – whichever is earlier.

What Happens If the Stock Is Purchased with a Loan?

Some companies may offer employees the ability to purchase stock using an employer-sponsored loan. The loan is then paid off in biweekly increments from the employee’s paycheck. To determine how much the non-recipient spouse may be entitled to, the first question is how much stock was earned during the marriage (prior to the date the divorce action was filed). Then, the value of the stock must be calculated net of any loans to the extent that marital funds were not used to pay off the loans. If marital funds were used to pay off the loans, then the value of the stock would not be reduced by the amount of marital funds used to pay off the loans.

As an example, W buys 100 shares on January 1st all of which vest within the year and are financed with a loan. W files for divorce on April 1st. If 25% of the stock had vested or was deemed earned by April 1st and if that part of the loan used to purchase the vested or earned stock was repaid, H would get 12.5% of the stock. However, if, by April 1st, only 5% of the stock has been paid for, H would only get 2.5% of the stock since the remaining 20% of the vested stock was encumbered by a loan.

Can You Negotiate How Stock is Treated in Divorce?

Spouses can choose to divide their marital property however they like. In the absence of an agreement on equitable distribution, the court will decide the division of assets based on the rules discussed here. Whether you negotiate or litigate, you should hire a financial expert to help ensure that the stock has been valued correctly and is distributed fairly.

If you are considering divorce, contact us to discuss how we can help protect your interests.

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