How to Split Stocks in a Divorce
It is not an easy or straightforward process to determine how to split stocks in a divorce. Stock options are the most challenging to sort out in a divorce. We will be discussing options for stock division in this blog.
Types of Stock Options – it is an important factor in determining how to Split Stocks in a Divorce
Employers usually use the stock options to attract, encourage, and further reimburse employees who perform beyond their original job roles.
Employers also tend to do so in order to make their employees feel a sense of ownership in the company by encouraging employees to either buy the stock immediately or on a later date known as a “strike price”. These options are typically there to make the employee stay with the company long term. Their general premise is to make it clear and to further motivate the employees to make the company succeed. These options are also there as a means of tax-deferring compensation for employees and their contributions towards the company who may be on low paying salaries.
There are two types of employment-related stock options – qualified (statutory) and non-qualified.
Qualified stock can be incentive stock options (ISOs) and options
granted under employee stock purchase plans (ESPPs)
As the name implies, incentive stock options exist to incentivise either potential employees to employment with the company or to encourage and make sure existing employees stay with the company and not leave for a competitor.
ISOs need to meet many statutory requirements. Some of them are:
The stock options should be exercisable within ten years of after they granted. However, the 5-year rule is applicable for someone who owns more than 10% of all voting classes of the options.
The stock owner can leave their stock to someone by will, he cannot transfer the options. The option’s price cannot be dropped below the market value on the day of granting it.
The employee stock purchase plan allows corporate employees to buy the stock at a good discount using payrolls deductions. The deduction accumulated between the day of buying the stock and day of the grant. This allows employer to buy stock on behalf of their employee with the 15% discount of the market price.
The Nelson and Hug formulas are the best for the calculation of how to split stocks in a divorce
In order to determine which formula to use, the attorney should look at the intent of the employer – whether the employer tried to award the employee for their past services or they want to encourage to stay on the job in the future. In the first situation, the Hug formula is used.
In the second situation, Nelson formula is used.
Under Hug, use of the following time-rule calculation: The number of options determined to be community property is a product of a fraction in which the numerator is the period in months between the commencement of the spouse’s employment by the employer and the date of the parties’ separation, and the denominator is the period in months between commencement of employment and the date when each option is first exercisable, multiplied by the number of shares that could be purchased on the date the option is first exercisable. The remaining options are the separate property of the employee.
There are other issue under the Nelson formula also known as “time rule,” the community property in the stock is determined as a fraction, the numerator is the length of service during the marriage and before separation. The denominator is the total length of service by the employee ex-spouse.
Under the Family Code 2552, stock options are usually valued during the trial day(s).
The valuation of stocks options depends on the difference between the value of the stock and option. Valuation of the stock turns on a variety of factors, including any restrictions placed on the stock subject to the option. Some factors are placed into consideration in valuation of
the stock options are: How strong is the financial condition of the company, stock’s book value, company’s earning capacity, history of business enterprise, the price of the stock of similar companies on the market, and the capacity of the company to pay dividends.
Stock options will be considered as income for spousal or child support if they can be viewed as an element of a supporting spouse’s compensation package for past, present, or anticipated future services.
If the stock is sold for profit as an exercise of option, the income is realized as very latest for the tax purposes and accordingly to support purposes.
On another hand, the shares of stock which the owner of the company received in connection with the sale of business, but that is unsold, is not income for the tax purposes. Thus, it cannot be counted for support purposes.