Stock options granted to a party during a marriage are considered marital assets subject to property division upon divorce, even if the options vest after the parties are divorced. However, whether stock options that are issued after a divorce are treated as income once exercised when calculating support is less certain. The recent Appellate Court decision of Jones v. Jones, No. 20-P-1217 (September 14, 2022) suggests that they may – but it all depends upon the drafting of the divorce agreement and the – parties’ intent when entering into the divorce agreement. Divorce agreements, often called “Separation Agreements,” must have clear language regarding the definition of income, bonuses, stock options, and other forms of executive or deferred compensation. Absent clear language that the vesting of stock options granted after a divorce is to be considered income when calculating support, that income may not be included when calculating support.
An employer’s granting of stock options as executive compensation has become increasingly popular. This provides the employee with additional compensation and an incentive to stay with the employer long term (as the employee needs to be employed by the company when the stock options vest, sometimes years after the grant) and allows the employer to pay the employee less in salary or a cash bonus.
The Child Support Guidelines make clear that “income derived from stock options and similar incentives, excluding any income from the coverture portion allocated at the time of the divorce” is included in a party’s income for calculating child support. The Court will generally not permit parents to bargain away the rights of their children to child support by entering into an agreement that intentionally excludes compensation otherwise includable as income under the Child Support Guidelines, like stock options. Therefore, the vesting of stock options, not otherwise includable in the division of the marital estate, should be included in a party’s income when calculating child support.
Parties can, however, define income for purposes of calculating alimony. The definition of income in a Separation Agreement is critically important, as the Jones case makes clear.
In Jones, the parties’ Separation Agreement provided that the Wife would receive additional alimony from the Husband upon the Husband’s receipt of “any manner of bonus” paid by his employer. As the language of the parties’ Separation Agreement was ambiguous as to whether stock options were included in the definition of “bonus,” the Court looked to the parties’ intent when they entered into the Separation Agreement to determine whether the parties intended for stock options to be included in “any manner of bonus.” The Jones Court found that “any manner of bonus” was a negotiated term between the parties, was intentionally restrictive, and that the parties’ intent when entering into the agreement was not to include stock options as bonus income when calculating alimony. The Court concluded that when the stock options granted to the Husband after the divorce vested, he was not required to pay the Wife additional alimony on receipt of those funds. The result was that the Husband was allowed to keep over $628,000 from the exercise of stock options granted to him by his employer without paying any of it as alimony to the Wife.
While some may say the Jones case provided a windfall to the Husband, the case makes clear that the drafting and definitions included in a Separation Agreement are particularly important in areas like executive compensation. A well-drafted Separation Agreement will define what is included in, or perhaps excluded from, the definition of “income” or “bonus.” Executive compensation is ever-changing: compensation forms may continue to evolve and change. A skilled divorce lawyer can guide you through the negotiation and drafting of a Separation Agreement to ensure that no ambiguity exists that may result in the exclusion or inclusion of forms of compensation that you had not considered.