Dealing with stock options in divorce can be akin to solving a Rubik’s cube puzzle. There are lots of moving parts and you need to understand how they fit together, both legally and financially, in order to get it right.
Stock options come in a variety of flavors. While there has been no definitive legal ruling on how to handle them, there are two cases (Baccanti is one and Wooters is the other) that come close.
Your lawyer will need to read and understand the plan documents, as well as to understand the purpose for which the options are awarded. There may be several different purposes for which a company is awarding options, and each category of option may require a different divorce treatment.
Taxation is also a critical issue. Stock options have a set purchase price at which the owner can purchase the stock. The idea being that the set price is lower than the market price when the owner exercises the options. When the stock is sold, the gain on the sale is taxed as ordinary income.
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Intangible Personal Property can be very technical to divide.
Pensions, IRAs and other retirement assets, deferred compensation, and stock options all need to be carefully handled.
Tax issues are of course apparent – there is only one right way to divide each type of retirement asset and if you do it wrong the tax consequences to the person initially owning the pension can be severe.
There are many precise aspects to handling stock options and deferred compensation as well. Agreements should be carefully done, as inadvertent results like in the Wooters case, can occur. In that case the agreement did not specify how future stock options would be treated, because the husband was not in a job that had options at the time of divorce. The definition of ‘”earned income” in the agreement, tracked the tax code which treats options as income when they are exercised. As a result, when he changed employment and received options they were treated as part of his income for support.
Deferred compensation comes in varied forms. Your attorney will need to be very familiar with the individual business plans that cover the particular compensation in question.
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