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The keys to dividing stock options in a Texas divorce

It is not a simple matter to divide stock options in a Texas divorce. A stock option is a benefit that you or your spouse may receive from your employer to supplement your income there. Your employer would give you an option to buy stock in your company at some point in the future at a price that is discounted compared to what you would be able to purchase it for on the open market. This can be attractive to many people in your position especially if you have money already invested in the stock market and your company stock has had a consistent rate of return over a long period. 

If stock options are on the table for you or your spouse, you need to pay close attention to this when you ever go through a divorce. Although there has not been any realized financial gain because of these stock options being made available to either one of you, the fact is that these options do have value. It is not a good idea for you to ignore these options if your spouse has been offered them by an employer. They should count towards the value of your community estate in terms of how assets are ultimately divided. 

The key question that you and your spouse will need to determine in a situation like this is exactly how to value these stock options. While the option may not vest until a later date, there should still be some value attached to those stock options. Assigning a percentage of value to attach to those stock options will be important for calculating the overall value of the community estate. It doesn’t matter whose name is on the stock option, either. All that matters is the date the stock option was made available to you. In that case, you are technically talking about these options as a community property asset. 

How would you even know about the stock options if your spouse didn’t tell you about them?

One part of this discussion that we have not brought up yet is how you may even come to know about these stock options if it is your spouse who has them. He or she may never have mentioned them to you previously. As a result, you may have no way of knowing about them. It would be a shame if you completed your divorce case and never had the value of those stock options calculated into the value of your community estate. You may be losing out on thousands of dollars that should otherwise have gone to you in the division of your community estate. 

With that said, we should discuss just what it means to be able to get access to this sort of information. The best way to go about doing so is to submit discovery requests upon your spouse early in the divorce. Discovery is a way for you and your spouse to submit questions and requests for information to one another to begin to learn all the facts and figures about your divorce. This way you can begin to build your case for a possible trial and to prepare for final orders mediation. 

If you suspect that your spouse has investments or other financial assets that you are not fully aware of then you should speak to your attorney about this. Depending upon your spouse’s job title, role within their company, or the length of their employment you may be able to give an educated guess as to whether stock options could be something that has been offered to him or her. When in doubt, discuss this with your family law attorney early in your case. 

Is the property part of the community estate?

This is the question that you need to ask yourself before you get into any of the details about the stock options. If the options are part of the community estate, then they are subject to division in your divorce. It doesn’t matter if they don’t have your name on them. On the other hand, if the stock options are part of your spouse’s separate property, then they could not be divided in the divorce by a family court judge. 

This is a complicated subject, however. Consider that in many circumstances you or your spouse may have been offered stock options to reward either of you for past work but also to motivate you to provide great work in the future, as well. By offering stock options, those options act as a carrot to motivate you to produce a great work product and stay at the company where you are currently employed. Many companies offer stock options as a method of future payment if they do not have the money now to offer a raise. 

When we think about the stock options as a method to compensate you or your spouse for past work performance then it complicates matters for us in a divorce. What if the stock option was granted to you before your marriage but it vests in the new few weeks? Is that community or separate property? What about a stock option that was provided to you two weeks after you filed for divorce? Community or separate property? 

The investigative part of this journey involves you and your spouse trying to determine the purpose for which the stock option was issued. If the option was issued for the work performed during your marriage, then it would be classified as community property. It can be difficult to determine one way or another how the property should be classified, however. You may need to perform some detailed discovery work during your case to gain access to your spouse's employee paperwork and hiring documents to determine the details about how, when, and for what purpose stock options are handed out to employees. 

What is the difference between a vested and unvested stock option?

While the primary question that you need to ask yourself about stock options has to do with whether the option is part of your community estate, it is also critical to find out more about whether the stock option is vested or not. Vesting is a reference to the amount of time that an employee like you or your spouse must wait before an option can be acted upon. An unvested option is one that you cannot decide on one way or another. A vested option is one that you can decide to buy, sell or do nothing with. 

This is yet another part of this discussion that makes it even more complex. What if you have a situation where your spouse has a stock option that was given to her in 2019 but does not vest until 2024? You and your spouse married in 2017. Are these unvested stock options community or separate property? It is difficult to determine one way, or another based on this limited amount of information. However, I raise the point to bring it to your attention so you can see just how critical a subject this can become in your case. A large percentage of your community estate’s value may be tied up in these stock options- if they are a part of your community estate at all. 

How do you assign value to these stock options?

Assuming that the stock options in your situation are a part of the community estate, the next thing that you will need to determine is how to assign them a value. When it comes to dividing up community property the way that this is typically done is all assets and all debts are added up together so that a total value for your community estate can be established. From there, you and your spouse can negotiate how to divide the property according to the circumstances of your case, particular financial needs as well as fault grounds (if any) for divorce. 

There are multiple ways to assign value to these stock options. Whatever the value of the stock option is currently, that will be subtracted from the current stock price. That number will then be multiplied by the number of options you own to get an overall value. If you work for a large company that is publicly traded, then this is a great option for you to utilize in the divorce. These are public dollar figures and there is no question about how the value was arrived at, as a result. Of course, this method does not consider the fact that the value of the shares could increase or decrease before the options become vested. Additionally, your spouse may leave their company before the vesting date, and they would never vest at all. 

The other option that I wanted to discuss in this blog post is to come to an agreement with your spouse on how to value these stock options. Ultimately whatever methods you all choose to implement are fine with a family court judge if they are based to a certain extent on real-life figures and are not so far out of touch as to be ridiculous. Family court judges just want to see that you all had an opportunity to work together to conclude. Even if that conclusion isn't exactly scientific, the judge is still likely to approve the method that you employed. 

How do you split the option between you and your spouse?

Once you have: 1) determined that the stock option is community property and 2) how to value the stock option you will then need to figure out how to divide the option between you as the person who has the option in your name and your spouse. The simplest method to employ in this situation is to not divide the option itself up but rather to take the value and give your spouse something else in the community estate that is equal in value. If you own stock options that are worth $100,000 then you may choose to slide $100,000 in cash or the equity from your home over to your spouse. 

That plan works ok unless you are in a situation where there are no ways to make up for that $100,000 if you don't have $100,000 in cash or other property laying around then you may be in for a bit of a struggle to make the transaction work as far as dividing up the community estate is concerned. Another method would be to allow the court or the two of you to decide on a formula that will detail how your spouse, as the non-employee spouse, will be paid once you choose to exercise the option. This way you don't have to agree on a current value of the stock options and would allow for you to value the options at the time that they are exercised. It is either a wait-and-see method or a punt-the-ball down-the-field method, depending upon your perspective. 

Noting in the final decree of divorce that notice must be given to your spouse when you end your employment with your current company for any reason is also a reasonable thing to include in your final orders. Additionally, your spouse would likely ask for notice to be given to him or her if you decide to exercise an option or if your employer re-prices the options. Finally, if your vesting date moves forward in time for any reason then you should have to give notice to your spouse. These are all reasonable expectations for both you and your spouse to have heading into negotiations for how to divide stock options. Typically, most stock options from a company prohibit the options from being transferred to another person and that is why you don't see that as an option in this blog post. 

Tax considerations related to stock options and divorce property division 

Once you own a stock option that will likely result in you taking on taxes as a result. The value of the option depends upon a lot of different factors. The key to this discussion is that the tax burden falls on the employee rather than the employee's spouse. So, this means that you need to prepare for this as much as possible. You may need to hold some money back if your employer does not do so for tax purposes. 

Final thoughts on stock options and divorce

The information that we have just gone through together is not simple nor fun to discuss. We realize that there are about a million different things that you would rather talk about than stock options about your divorce case. However, this is important when it comes to the overall value of your community estate. In closing today, we will share with you an overview of how you may want to go about tackling this issue alongside your experienced family law attorney.

On the one hand, you should expect that there may be an issue getting to the bottom of the stock options if they were not already known to you. If you suspect that your spouse has stock options in their name from their employer but know nothing about their details of them, you will have to submit discovery requests. Work with your attorney to submit requests as early as you can in the divorce so that you have more time to value the options, consider whether they are part of the community estate and then make settlement proposals on how the estate should be divided considering the stock options as well as the other community property that exists. 

When you are interviewing potential attorneys to represent you in your divorce case you should ask questions about subjects like this. Your instinct may be to get into the “he said/she said” side of your divorce but I would tell you that an attorney can only offer so much on issues like that. However, the issue of dividing up stock options will allow you to learn more about how the attorney works a case and how he or she can help you when it comes to preserving as much of your community property as possible. 

Stock options can be an extremely valuable part of a community estate. These are not assets that you may think about right off the top of your head, but they are nonetheless important in the grand scheme of your case if they exist. You should do everything possible to dig up assets like this using discovery and then should negotiate with a plan in mind for how to divide these assets up. Doing so will put you in a position where you can feel like you did everything you could to help yourself get a fair shake in the divorce process. 

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorney offers free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great opportunity for you to learn more about the world of Texas family law as well as about how your family's circumstances may be impacted by the filing of a divorce or child custody case. 

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