Divorce. In any number of ways, it can be difficult – both emotionally, and practically. That’s simply the nature of the process. Deciding to divorce is emotionally difficult – and addressing all of the issues that come after can seem like a complicated, and even overwhelming task. In most divorces, there are many issues that couples must confront and address – issues like child custody and child support, alimony, and property division are some of those most often encountered. Moreover, every “issue” has its own unique set of sub-issues – a fact that is particularly true when it comes to property division, especially if the couple has been together for some time and accumulated a significant number of assets or debts.
Some types of property are relatively easy to divide, and others prove more challenging. Stock options usually fall into the latter category. If you have stock options, you probably already know that a stock option is a particular type of employment benefit in which the employer provides its employees with the option to buy company stock in the future at a discounted or fixed price. Simply because of the nature of this type of benefit, determining how to go about dividing it can be challenging. It’s important to make the effort to address this issue, though, as these options can end up being quite valuable in many cases.
As you consider the possibility of dividing your stock options, there are a few issues you’ll want to consider:
- Is the stock option marital, or separate property? During a divorce, marital property is usually divided between the parties, while separate property remains the property of the individual to whom it belongs. Generally, property that was acquired before the marriage and has remained the sole property of one person is considered separate property, but with stock options, this can become a bit complex. Often, options given during the marriage may be a reward for past work – sometimes work performed before the marriage itself took place. If it was granted for work performed during the marriage, however, it will usually be considered marital property. Making this determination will be essential to determine whether or not the option will be considered divisible property during the divorce.
- Is the option vested or non-vested? The “vesting” period for a stock option refers to the amount of time that an employee has to wait before he or she can exercise an option. For example, an option may have initially been granted to an employee in 2015, although not allowed to be exercised until 2020. For the five years from 2015 to 2020, the option would be considered “unvested”. Naturally, this can cause some confusion in determining if the option is separate or marital. For instance, if the spouses were married in 2015, but an option granted in 2015 did not vest until 2020 when the couple had already separated, do they still split the option? In the majority of cases, the answer is yes – although consulting with your attorney and potentially a financial advisor concerning your particular circumstances is always a wise decision.
- Valuing the option: Once you have determined whether the option is marital or non-marital, and vested or non-vested, you’ll need to value it for the purposes of property division. This can be a complex process, and in North Carolina, several methods can be used, including:
- The intrinsic value method: This method of valuation takes the option value of the current stock price, minus the option strike price, multiplied by the number of options owned. This will determine the value and will give an idea of how the option can be split, and how much value each spouse will receive.
- The Black-Scholes Model: This model is often quite complicated, and usually requires the assistance of a professional, like a forensic accountant. Essentially, it produces a theoretical estimate of the value of the option based upon derivative investment instruments, and consideration of numerous factors.
- The coverture fraction: This is not one of the more common ways to value a stock option, but it is occasionally used. This method divides the length of time that the employee spouse was simultaneously married and contributing to the earning of the stock options by the total length of employment in which the options were earned.
Of course, as with most issues that arise during a divorce, another far simpler option is to reach an agreement, together, as to how to divide the option. Ultimately, if a couple chooses to reach an agreement, they can value and divide the option in any way they see fit, given their circumstances and what they feel is the best result for everyone involved. While reaching an agreement is not possible in every divorce, it is an effort at least worth pursuing before utilizing other methods.
After you’ve determined whether or not an option is marital property and whether or not it is vested, and have determined how you will divide it, you’ll still need to actually make that division. With an intangible asset like an option, this can be difficult. One of the most common methods for doing so is to have the employee spouse who owns the option offset the value of the option with another asset. For example, if an option is valued at $60,000, the non-employee spouse is entitled to $30,000. Rather than trying to split the option itself, which may trigger unwanted tax consequences, the non-employee spouse may agree to take the $30,000 he or she is owed by accepting another asset in that amount, such as a lump sum cash transfer, or by taking the title to a vehicle, retirement account or other asset worth a comparable amount. Ultimately, there are a variety of options available, and seeking the advice of an attorney and financial expert is always advised.
If you find yourself contemplating divorce and you’re concerned about how you’ll divide your property or any other issue you may confront, at The Law Office of Dustin McCrary, we’re here to help. We have the knowledge and experience you’ll need on your side to move through this process in a way that minimizes stress and maximizes your opportunity to resolve your issues in a way that works best for your family. Call us at any time. We look forward to learning how we can help.