Stock Options Definition: A stock option is the right given to an employee by a corporation to purchase a set number of shares of the corporation’s stock during a specific period of time at a fixed purchase price.

General Discussion: If an employee is given a stock option he/she is not required to purchase the stock, but can or may elect to exercise the option at his/her choice. Stock options are either statutory or nonstatutory.

Statutory options give the employee the ability to take advantage of special federal tax treatment that is accorded to incentive stock options. If the federal statutory regulations are met, the employee will not have to pay ordinary income tax on the options when they are granted or exercised. After they are exercised and sold they are taxed at the appropriate capital gains rate, provided they are held for the required amount of time. On the other hand, nonstatutory options usually are taxed as regular income when the option is granted (when the stock is purchased).

Why do corporations offer employees stock options? In order to determine the answer, each stock option should be analyzed on a case by case basis. The more common reasons are as follows:

1. The corporation wants to provide an incentive for the employee to remain with the company. This would represent compensation for services to be rendered in the future.

2. Options are offered to attract new employees who are usually then paid below the going rate in return for part of the future growth of the corporation. This would represent deferred compensation for services rendered in the present.

3. The corporation wants to give the employee a bonus for having done a good job. This would represent compensation for services rendered in the past.

Classification: In order to determine if stock options should be considered a marital asset subject to distribution, the critical issue revolves around the reason the corporation granted the stock options. Were they granted for past, present or future service? The courts generally follow a four step process to determine the marital portion.
Step 1: The court must determine the number of shares granted for past and future service.
Step 2: The number of shares granted for past service is deemed to be marital to the extent that the marriage coincides with the period of employment until the granting of the options.
  Most states apply a coverture fraction (time rule) to determine the marital portion. The numerator of the fraction would represent the later of the beginning of employment or the beginning of the marriage to the date the options were granted, and the denominator the date of employment to the date the options were granted.
Step 3: A second coverture fraction (time rule) would be applied to the number of shares granted for future service to determine the marital portion. This would represent the growth from the date the options were granted to the date the marriage ended (cut off date) and any additional growth due to contributions of the non-employee spouse.
Step 4: All options found to be marital could be divided between the parties. Any options not deemed marital property would remain the sole property of the employee spouse.

Most equitable distribution states have adopted the following positions relative to the classification of stock options:

Stock options which are exercisable upon the date the marriage ended or which may not be cancelled, and which may, therefore, be said to be vested as of the date the marriage ended, are viewed as marital property. Any stock options which are not exercisable as of the date the marriage ended and which may be lost as a result of events occurring thereafter (not vested), would be treated as the separate property of the employee spouse, even though they may vest at some time in the future.

Stock options that are designed to vest and become exercisable over a period of time should be considered both compensation for the employee’s past services and incentive for the employee to continue employment in the future. The options which have already vested would be a reward for past service rendered during the marriage, and, therefore would be marital property. Those options which have not vested represent a future right contingent upon continued service, and therefore would be considered non-marital property.

Most community property states take the opposite position. They have determined that unvested stock options constitute a contingent interest in property, and therefore are a community asset.

Valuation: The valuation of stock options is not difficult. The option is valued at the market value of the stock on the date of valuation less all costs associated with exercising the option. However, this simple calculation can be complicated by other factors such as:

  1. Tax liability to the optionee;
  2. The optionee may have to continue employment in order to exercise the option;
  3. After exercising the option the optionee may be prevented from selling the shares;
  4. The options may not be vested on the date the marriage ended;
  5. The optionee may have to borrow money to exercise the option; and
  6. There could be other contingencies.
Distribution:

Immediate Offset: Some courts take the position that this is the most equitable approach to use if the options can be valued. This is true even for options that have not been exercised. The optionee bears all risk relative to loss due to any cause. The optionee is awarded all the options and the non-employee spouse receives property of equal value.

Deferred Distribution: Because the possibility exists that the options might not be exercised most courts retain jurisdiction until they expire or are exercised to make a distribution between the parties.

State Case Law

The following is a summary of case laws we have come across in our research of this topic. If nothing is listed under a particular state it is because we have not found any pertinent cases relative to this topic. If you know of a case that relates to this topic, and do not find it listed here, please e-mail us the citation so that we can include it in this section.
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ALABAMA

ALASKA

Broadribb v. Broadribb, P. 2d (Alaska 1998)
Should be valued. Future tax consequences of exercising stock options need not be considered in valuing marital estate.

ARIZONA

ARKANSAS

Hutto, No. CA 92-51 (1992)
Only options exercisable as of date of divorce are marital.

Richardson v. Richardson, 280 Ark. 498, 659 S.W.2d 510 (1983)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

CALIFORNIA

In re Marriage of Nelson, 177 Cal. App. 3d 170, 222 Cal. Rptr. 790 (1986)

The stock options owned but not exercisable as of the date of separation were in part community property for the same reason that a pension plan which is subject to divestment by termination of employment has a community property aspect. They were granted for services rendered and to be rendered.

To determine the marital portion the trial court utilized a formula in which the numerator was the number of months from the date of grant of each block of options to the date of the couple’s separation, while the denominator was the period from the time of each grant to its date of exercisability.

Options which had not been granted as of separation are confirmed to optionee as his separate property

In re Marriage of Hug, 154 Cal. App. 3d 780, 201 Cal. Rptr. 676 (1984)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

COLORADO

In re Marriage of Huston, 967 P.2d 181 (Colo. Ct. App. 1998)
A stock option that is not vested does not constitute property. Only a vested stock option is "property" subjection to a determination of whether it was granted in consideration of past or future services for purpose of ascertaining it’s marital or separate nature.

Court may retain jurisdiction over the distribution and valuation of stock options so that each party will "share in the risk of the fate of each of the options.

In re Marriage of Miller, 915 P.2d 1314 (Colo. 1996)
To the extent an employee stock option is granted in consideration of past services, the option may constitute marital property when granted. On the other hand, an employee stock option granted in consideration of future services does not constitute marital property until the employee has performed those future services.

Restricted stock options constitute marital property in their entirety where they represent a form of deferred compensation because husband had already earned the right to receive those shares. That husband’s full enjoyment of the benefit is conditioned on his remaining an employee affects the present value of the restricted stock shares, not their marital nature.

In re Marriage of Renier, 854 P.2d 1382 (Colo. Ct. App. 1993)
Stock options owned by husband at the time of marriage but exercised during the marriage using marital funds are presumed to be marital property in the absence of a showing that husband used separate property, such as money he received from an inheritance, to exercise the options.

CONNECTICUT

DELAWARE

DISTRICT OF COLUMBIA

FLORIDA

GEORGIA

HAWAII

IDAHO

ILLINOIS

In re Marriage of Frederick, 218 Ill. App. 3d 533, 578 N.E.2d 612 (1991)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

In re Marriage of Moody, 119 Ill. App. 3d 1043, 457 N.E.2d 1023 (1983)
Stock options do not constitute property under this section until such time as they are exercised.

INDIANA

Hann v. Hann, 655 N.E.2d 566 (Ind. Ct. App. 1995)
Stock options not exercisable as of the date of separation, and which will become exercisable at a particular date in the future conditioned upon husband’s continued employment, were not subject to division as marital property.

Hiser v. Hiser, 692 N.E.2d 925 (Ind. Ct. App. 1998)
Court can/should deduct taxes paid after exercising a stock option when valuing a marital estate.

IOWA

KANSAS

KENTUCKY

LOUISIANA

Goodwyne v. Goodwyne, 639 So. 2d 1210 (La. Ct. App. 1994)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

MAINE

MARYLAND

Green v. Green, 64 Md. App. 122, 494 A.2d 721 (1985)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

MASSACHUSETTS

MICHIGAN

Lesko v Lesko, 184 Mich App 395, 403; 457 NW2d 695 (1990)
Wiand v Wiand, 178 Mich App 137, 151; 443 NW2d 464 (1989)
Everett v. Everett, 195 Mich. App. 70, 489 N.W.2d Ill (1992)

Trial court erred in valuating the options without taking into consideration the tax consequences.

MINNESOTA

Lomen, 433 N.W.2d 142 (1988)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

Salstrom v. Salstrom, 404 N.W.2d 848 (Minn. Ct. App. 1987)
Incentive stock options obtained during the marriage but exercisable in the future have marital and non-marital aspects which can be apportioned upon dissolution.

MISSISSIPPI

MISSOURI

Smith v. Smith, 682 S.W.2d 834 (Mo. Ct. App. 1984)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

MONTANA

NEBRASKA

Davidson v. Davidson, 254 Neb. 656, 578 N.W.2d 848 (1998)
Employee stock options and stock retention shares are a form of deferred compensation, and in Nebraska, deferred compensation is property for purposes of determining the contents of the marital estate.

As a general rule, all property accumulated and acquired by either spouse during the marriage is part of the marital estate, unless it falls within an exception to the general rule. Such exceptions include property accumulated and acquired through gift or inheritance or property held in trust by a third person, but do not include property obtained through one or both spouses’ employment.

To determine which percentage represents compensation for past, present, and future services, neither the language of the employee stock option or stock retention share agreement itself nor the testimony of the employer is dispositive. Relevant, nonexhaustive considerations include whether the employee stock options or stock retention shares were intended to (1) secure optimal tax treatment, (2) induce the employee to accept employment, (3) induce the employee to remain with the employer, (4) induce the employee to leave his or her employment, (5) reward the employee for completing a specific project or attaining a particular goal, and (6) be granted on a regular or irregular basis.

NEVADA

NEW HAMPSHIRE

NEW JERSEY

Pascale v. Pascale, 140 N.J. 583, 660 A.2d 485 (1995)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

NEW MEXICO

Garcia v. Mayer, N.M. 920 P.2d 522 (Ct. App. 1996)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

NEW YORK

DeJesus v. DeJesus, 90 N.Y.2d 643, 665 N.Y.S.2d 36 (1997)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

NORTH CAROLINA

Hall v. Hall, 88 N.C. App. 297, 363 S.E.2d 189 (1987)
Stock options not exercisable at the time of dissolution are not marital property.

Stock options granted an employee by his or her employer which are exercisable upon the date of separation or which may not be cancelled, and which may, therefore, be said to be vested as of the date of separation, are marital property.

Options which are not exercisable as of the date of separation and which may be lost as a result of events occurring thereafter are not vested, and should be treated as the separate property of the spouse for whom they may, depending upon circumstances, vest at some time in the future.

NORTH DAKOTA

OHIO

Brown v. Brown, Case No. 92 CA 12, 1994 Ohio App.
Ohio appellate court agreed the trial court’s failure to consider stock options earned during the marriage was error, remanding the case to the trial court to determine the value of the appellant’s stock options and to make a property distribution accordingly.

OKLAHOMA

Ettinger v. Ettinger, 637 P.2d 63 (Okla. 1981)
Stock options not exercisable at time of dissolution are not marital property.

OREGON

In re Marriage of Powell, 147 Or. App. 17,934 P,2d 612 (1997)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

PENNSYLVANIA

Gordon v. Gordon, 436 Pa. Super. 126, 647 A.2d 530 (1994)
Stock option shares purchased during the marriage, prior to separation, are marital property as well as their increase in value.

RHODE ISLAND

SOUTH CAROLINA

SOUTH DAKOTA

TENNESSEE

TEXAS

Bodin v. Bodin, 955 S.W.2d 380 (Tex. App. 1997)
Unvested stock options constitute a contingent interest in property and are a community asset subject to consideration along with other property in the disposition of the parties’ estate; therefore, the trial court did not err in the division of the parties’ community estate based upon that assumption.

Demler v. Demler, 836 S.W.2d 696 (Tex. Ct. App. 1992)
The trial court erred in failing to divide stock options.

UTAH

VERMONT

VIRGINIA

Dietz v. Dietz, 17 Va. App. 203, 436 S.E.2d 463 (1993)
Husband’s stock options were a part of a deferred compensation plan; the stock option agreements permitting the purchase of stock in the employer were offered to "key employees," the options could be exercised only by the employee in the amounts and at the times prescribed by the agreements, and the options lapsed at specified intervals following the termination of the husband’s employment, thus, the husband’s stock options were part of a plan of deferred compensation that should have been considered under this section providing for the division of pension, profit-sharing or deferred compensation plan.

Donohue, No. 2675-96-2 (1997)
Where stock options through husband’s employer were fully vested at the time of the parties’ separation and were not conditioned on the husband’s continued employment; and although the husband was required to wait for one year before exercising the options, the right to exercise the options at that time was fully vested; the trial judge correctly ruled that the entire value of the stock options was marital property.

WASHINGTON

In re Marriage of Short, 125 Wash. 2d 865, 890 P.2d 12 (1995)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

WEST VIRGINIA

Kapfer v. Kapfer, 187 W. Va. 396, 419 S.E.2d 464 (1992)
Stock options acquired during the parties’ marriage should have been considered by the circuit court, to determine what value they have, and how much of that value should be considered marital property subject to equitable distribution.

To the extent stock from an employee stock option plan is part of the assets for distribution of marital property, the value of the stock shares should not be considered as income.

WISCONSIN

Chen v. Chen, 142 Wis. 2d 7, 416 N.W.2d 661 (Ct. App. 1987)
Stock options that are not presently exercisable at the time of dissolution constitute marital property subject to equitable distribution.

WYOMING


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