STOCK OPTIONS: BOTH AS COMMUNITY ASSETS AND AS INCOME

Christa D. Banfield, Esq.

It has become increasingly popular for companies to offer stock options as part of an overall benefit package to attract and keep employees. Typically these stock options are granted at a certain time but do not vest until 1, 2, and even 3+ years into the future, giving the employee motivation to stay with the company and help the company to succeed.

These stock options are important to consider during the divorce. Stock options awards can be assets of the marriage. As Arizona is a community property state, assets obtained during a marriage are presumed to be community property. But how does that apply when the asset in this case is granted during the marriage but does not vest until after a divorce? Are the stock options community property since they were granted during the marriage, or separate property since they vest after the date of service? The answer is both.

In deciding how to divide the stock options in the event of a divorce, the Court must consider the company’s intent in awarding them. Were they offered as an incentive to leave one’s current employment and join the company? Were they given as a reward for meeting performance goals? Were they given as an incentive to stay with the company into the future? This makes a difference in determining what formula the Court should use to divide the options. The formulas themselves come from California appellate cases known as Hug and Nelson- the Hug formula being more favorable to the community and Nelson being less so.

Aside from determining how to divide the stock option as assets, the Court can also consider the value of such continuing awards of stock options as income to the spouse receiving the same. Stock options can be a significant portion of the divorcing employee’s compensation and can be considered when determining a spouse’s income for the calculation of family support. The Court must consider the income of both parties when making determinations on spousal and child support. While awarded but unvested stock options may not count towards a person’s income, vested but not yet exercised stock options would count, as Arizona courts have found that “child support should not be subject to the investment decisions or whims of the employee parent.”

Calculating and dividing stock options in divorce and analyzing the same as income for purposes of spousal maintenance and child support can be a complicated undertaking. If you would like to work with one of our experienced Attorneys to learn more, please call OWENS & PERKINS at (480) 630-2464 to schedule your free 30 minute consultation.

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