Stock Options Divorce Division

Are Stocks Marital Property

Stock Option Counsel

Stock options are a benefit in the form of an option given by a company to an employee to buy stock in the company at a discount or at a stated fixed price.  Stock options allow employees to buy company stock (the underlying security) at a predetermined price, called a “strike” price.  Oftentimes, there are stock option plans specifically for employees and stock option plans for higher-up executives.

When Is A Stock Option Community Property?

Selling Stock During Divorce

When it comes to divorce, stock options can be categorized in two ways:

  • The option was granted before the party was married but  vests after the party is married;
  • The option was granted during the marriage and vest during the marriage; and
  • The option was granted when the party was married but vests after the divorce is finalized.

When Are Stock Options Separate Property?

Unvested Stock Options In TX

Stock Options Divorce DivisionThe Texas Family Law Code Section 3.007 provides a formula to determine whether the stock options are community property or separate property. Essentially, if stock options were recently issued to you during the marriage and before the divorce is finalized, the larger percentage of those stock options will be separate property.  Conversely, the longer that you were issued the stock options during the marriage until the vesting period, the larger percentage of the stock options will be community property.  Under Tex. Fam. Code §3.007:

(d) A spouse who is a participant in an employer-provided stock option plan or an employer-provided restricted stock plan has a separate property interest in the options or restricted stock granted to the spouse under the plan as follows:

(1) if the option or stock was granted to the spouse before marriage but required continued employment during marriage before the grant could be exercised or the restriction removed, the spouse’s separate property interest is equal to the fraction of the option or restricted stock in which:

(A) the numerator is the sum of:

(i) the period from the date the option or stock was granted until the date of marriage; and

(ii) if the option or stock also required continued employment following the date of dissolution of the marriage before the grant could be exercised or the restriction removed, the period from the date of dissolution of the marriage until the date the grant could be exercised or the restriction removed; and

(B) the denominator is the period from the date the option or stock was granted until the date the grant could be exercised or the restriction removed; and

(2) if the option or stock was granted to the spouse during the marriage but required continued employment following the date of dissolution of the marriage before the grant could be exercised or the restriction removed, the spouse’s separate property interest is equal to the fraction of the option or restricted stock in which:

(A) the numerator is the period from the date of dissolution of the marriage until the date the grant could be exercised or the restriction removed; and

(B) the denominator is the period from the date the option or stock was granted until the date the grant could be exercised or the restriction removed.

(e) The computation described by Subsection (d) applies to each component of the benefit requiring varying periods of employment before the grant could be exercised or the restriction removed.

If stock options exist in your estate, it is important to obtain the grant issuance documents for the stock units awarded, which sets out the strike or exercise price that you must pay to obtain the stock shares.  The grant documents also set out the vesting schedule so that the correct calculation can be made to determine separate property and community property.  Stock options become more valuable to the community estate when an entity’s stock price has increased over time and typically the appeal of stock options is that the strike price would be lower than the current price to purchase shares.

There are certain restrictions that come with stock options. These restrictions are detailed in the stock option agreement. For example, some stock option agreements indicate that if an employee resigns they forfeit the stock. It is important to talk to an experienced divorce lawyer to help you understand the restrictions. Your divorce attorney can also ensure that stock options are divided fairly during the divorce.  Stock options are complicated and typically input from your divorce attorney and a CPA is helpful to determine the value of the asset and the different ways that it can be handled in your divorce.

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