When you have decided to get a divorce in California, some assets are easy to divide without much debate or controversy, such as selling a car and splitting the value equally, a 50/50 split.
However, when it comes to dividing stock options, especially in a high-asset or executive divorce, there are often challenges and heated debates. Stock options that don't have real value are difficult to divide between spouses, but California family courts have several ways to handle dividing stock options in a divorce.
If you're getting divorced, you may be seeking a way to divide or split stocks or stock options that may not have vested. How, then, could you expect to split these potentially valuable assets?
Stock options are generally described as giving someone the right to buy a company's stock at a later date at a specific price. Stock compensation packages are standard for companies that are growing and seeking to build their future value, especially in the Silicon Valley area of California.
In some divorces, your stock holdings could be their highest-valued assets, which means you will need to deal with them in your divorce.
When going through the California divorce process, you must go through “disclosure,” where you and your spouse must provide documentation related to your finances.
This will include your income, expenses, debts, bills, and assets, including stocks. Perhaps you own stock options, founder's stock, or restricted stock units (RSU)? How to divide these types of investments will vary based on your holding shares.
Sometimes parties will need an expert accountant to determine the community value. For example, some employment contracts pay stock options only if you continue working for a set number of years, but the parties may separate before the agreement is completed. The question is, then, how are the benefits to be divided? They could follow a time rule.
One of the most challenging aspects of dividing stock options involves valuing holdings that have not yet vested. Our California divorce and family law attorneys will look at this topic below.
Are the Stock Options Community Property?
California is a community property state which means there is a presumption that any assets, including stock options acquired during the marriage, are considered marital property:
- Community property assets are divided equally between the spouses in a California divorce;
- The “cut-off” date for a marital property is when you separate when one spouse takes a direct step to inform the other that the marriage is over.
Sometimes spouses will need an expert accountant to determine the community value. For example, some employment contracts pay stock options only if you continue working for a set number of years, but spouses may separate before the agreement is completed. The question is, then, how the benefits are to be divided?
Vesting interests, however, are different. There is a time rule when a spouse divides unvested stocks, stock options, or restricted stock units in a California divorce.
This means that if you acquired stock options or RSUs before the marriage, but they vest. At the same time you were married, or after the separation, the family court will split these stocks between the community and separate property based on the length of the marriage and working during the vesting period.
What About Separate Property?
On the flip side, in a California divorce, you will be able to keep all of your separate property, including;
- Anything you owned or earned before the marriage,
- Anything you acquired after the date of separation, and
- Any individual inheritances or gifts you acquire during your marriage.
Separate property is not considered part of the marital estate, meaning any spouse who owns separate property gets to keep it after the divorce.
Thus, any stock options granted to the employee spouse before they got married or after the separation are considered the employee spouse's separate property and will not be divided in the divorce.
What About Splitting Stocks in Divorce?
California family courts consider stocks in publicly-held corporations as a return on capital, meaning the ownership interest is decided based on the initial investment.
For example, if the original investment is separate property acquired before marriage, then any stock dividends will remain separate even if you stay involved in the business.
Tracking the source of the property might involve an examination of the funds that were initially used to buy the stock options. Suppose the original funds were from a joint marital account? In that case, the family court will likely consider the stocks as community property and an equal 50/50 split.
When a court determines the division of marital assets in a divorce, they will consider any benefits from a spouse's employment during the marriage.
Suppose you owned stock in a business before getting married? Then your spouse has a community property interest in the increased stock value related to any efforts to grow the company during the marriage. Determining the value of stocks is often complicated by different formulas to provide an estimate of capital versus business efforts.
When courts attempt to determine what portion of the stock options belong to the non-employee spouse, they usually use one of several formulas called "time rules." However, the two primary methods are called the
- Hug formula, and
- Nelson formula.
The court must first determine why the options were given to the employee. This will generally determine which rule is more appropriate.
The Hug formula is primarily used when the stock options were intended to initially attract the employee to the job or as compensation for past performance. The Nelson formula is used when the stock options were designed to compensate for future performance.
What About Dividing Restricted Stock Units?
If you have restricted stock units (RSUs), you will receive a share of a company's stock under specific conditions. They are restricted due to a vesting schedule.
When calculating the division of RSUs in a divorce, the community property rules use one of two formulas discussed above: the Hug formula and the Nelson formula.
As noted, the Hug formula handles RSUs as deferred compensation for past performance, while the Nelson formula addresses them as an incentive for future performance.
In determining how to divide RSUs in your divorce, you will need to decide whether you want to split the shares or attempt a buyout. Typically, under the community property laws in California:
- RSUs before marriage, but vested while married, will have both community property and separate property value;
- RSUs during the marriage, but vested after separation, will also have both community property and separate property value;
- RSUs vested during the marriage is marital property to split equally;
- RSUs after separation or divorce are separate property.
Readers should note that another option is to retain all of the value of the RSUs in exchange for giving other assets to your spouse, such as cash or property.
What About Dividing Founder's Stock in California Divorce?
Perhaps you are holding stock in a business you founded? In that case, California family courts will use acquisition time rules.
As noted, if you were married when you founded your business and all your stock options are vested, then your business is marital property, even in a scenario where your spouse never participated in building the company. If you are divorcing, your spouse is legally entitled to half the company's value or any stock options you hold.
If you were already married when you founded the company and the stock vests after the date of separation, it would be divided based on the time rule. Still, a non-working spouse will not usually be able to gain control of your company.
If you have privately held stocks, they will generally be divided equally in a divorce. If you don't want your ex-spouse to have stock in your business, you can buy out their interest in your company.
A popular option is negotiating the value of another asset, such as the marital family home, in exchange for your spouse's holdings in the company.
Get Professional Legal Representation for Your Divorce
Before making a mutual divorce agreement to give away rights in your stock options, you should consider consulting with a California family law attorney.
You might want to keep an interest in these shares and their potential profits. Suppose the company goes public or the shares become highly valuable due to an acquisition later? In that case, you will have made a wise financial decision, not just to give away your shares in a divorce.
The division of stock options in a California divorce can become a complicated area of family law. In high-net-worth divorces, splitting stock options and restricted stocks are often the most highly debated and contested issues.
Suppose you need more information or have questions about dividing stocks in a divorce? In that case, you need to review your situation with a family law attorney familiar with all the intricate details of stock options.
Furman and Zavatsky are California divorce and family law attorneys in Los Angeles County. Our firm provides a free case evaluation by calling (818) 528-3471 or use the contact form.