When spouses file for divorce, their marital property will be equitably distributed between them with equitable not meaning equal but fair under the circumstances. Generally, it is simple to determine whether an asset constitutes marital property. However, in the case of stock options, it may be more complicated especially if the options vest over a period of years. Depending on the circumstances, a spouse may or may not be entitled to a portion of the other spouse’s stock options.
Only marital property is subject to division in divorce. “Marital property” is property acquired after the parties’ wedding date up to the date a divorce is filed. In determining whether stock options qualify as marital property, the key question is when did the spouse with the stock option (the titled spouse) earn the right to the stock option. If the titled spouse earned the right to the stock option during the marriage, then it would be marital property and the non-titled spouse would be entitled to equitable distribution of that asset.
A stock option gives an individual the right, but not the obligation to buy or sell a stock at an agreed upon price for a fixed period of time. These rights are often given by employers to certain employees as an incentive to work for the company. Stock options typically vest over a specified period of time (usually 3-5 years) with a certain percentage vested (or earned) each year. For example, if an individual were granted a stock option for 1000 shares to vest over 5 years, generally speaking, each year he or she would earn 200 shares. Importantly, options don’t belong to a person until he or she has met the requirements of the vesting schedule.
As noted above, the issue with stock options is when was it earned. In the example above, let’s say the couple filed for divorce on January 2, 2021. Any stock options earned before that date would be marital property, even if the spouse did not receive the stock until February 2021 after the divorce was filed.
Negotiating property distribution in divorce can be confusing and contentious. It is important to have experienced legal and financial advisors working with you to determine what assets are subject to division and how they should be valued to help ensure marital property is divided fairly.
If you are considering divorce, contact us to discuss how we can help protect your stock options.