The disbursement of community property at the end of a marriage can be complex. Stock options can be an important part of a divorce settlement. This type of option allows an employee to purchase company stock at a specific price for up to 10 years after a preset waiting period. The stock can then be sold at market value, which may exceed the original purchase price and result in significant net gain.
Recent court cases attest to both the complexity of stock options in a divorce agreement and the need for foresight in terms of potential changes in spousal income. One case determined that stock options held at the time of a divorce were joint, communal assets. Net profits derived from the stock options were to be equally divided when they were sold, with each person having the option of liquidating their share when they desired.
Another case took a different slant. The wife was granted one-third of her husband’s future income. After the divorce, the husband took a position that conferred stock options. Twelve years later, he sold the stock and realized a large profit which was reported as income. In accordance with the divorce agreement, his wife was eligible for one-third of that amount. In this case, if the options had been bought and held at the beginning of his employment with the new firm, the appreciation of stock value would have been seen as capital gains rather than income.
Divorce is a time of transition and decision. With an attorney’s advice, the process may be easier and more equitable.
Source: Private Wealth, “Weighing Divorce ‘Options’“, Marc D. Bello, January 07, 2014