Stock Options and a Divorce in California

by Wayne Thomas
    In California, stock options granted during the marriage are subject to community property rules in divorce.

    In California, stock options granted during the marriage are subject to community property rules in divorce.

    Digital Vision./Photodisc/Getty Images

    Wages are a standard form of payment for employment services. However, workers may also be offered the ability to purchase shares in their employer's company in lieu of compensation or to entice them to stay at the job. These are known as stock options, and if the employee gets divorced in California, the options can come into play in the property division phase of the divorce. Understanding how the court classifies and values stock options will help reduce some of your confusion during this process.

    Community Property

    California is a community property state. This means that during a divorce each spouse is deemed to have a one-half interest in most property acquired during the marriage. Once the community property is determined and valued, a judge allocates it between spouses in an attempt to fashion a near equal division of assets after divorce. However, property acquired either before marriage or after the parties separate is generally deemed "separate" property and remains with the spouse who acquired it.

    Understanding Stock Options

    Stock options can present unique issues in divorce. A stock option is the right of an employee to buy a specified number of shares in his employer's corporation at a certain price for a period, either presently or after a set date in the future. These options are often meant to encourage an employee to stay with the company -- and sometimes the option does not "vest" or become exercisable for several years after it is granted. This means that the employee's right to purchase stock may not be immediate, which can affect its value in a divorce.

    Timing

    California courts have ruled that stock options are subject to community property rules in divorce. If the option was granted during the marriage and the employee had the right to purchase the stock during the marriage, the entire present market value of the option is typically considered community property. By contrast, if the option was granted after the date of separation, the option is likely considered to be wholly separate property.

    Vesting after Separation

    If the option was granted during the marriage but the stock can only be purchased at a date after the parties have separated, judges in California apply what is called a "time rule" formula to determine what portion of these shares are considered earned during the marriage and thus can be divided as community property. The timing of when the option was granted and whether it was for compensation or for future services or retention play key roles in determining what time period the court uses in the formula and the resulting fractional community property interest. Because these valuations can get complicated, parties often choose to retain the services of an attorney during the process.

    Allocation

    Once the value of the stock option as community property is determined, it is often reduced by the expected tax burden to be incurred when the stock is eventually sold. California courts then must determine how to apportion the remaining community interest between spouses. Because stock options are often non-transferable, and may be affected by a spouse's future decision to leave his employment, the court may decide to let the employee spouse keep the entire option while offsetting the award by a larger share of other community property assets, such as cash, to the other spouse.

    About the Author

    Wayne Thomas earned his J.D. from Penn State University and has been practicing law since 2008. He has experience writing about environmental topics, music and health, as well as legal issues. Since 2011, Thomas has also served as a contributing editor for the "Vermont Environmental Monitor."

    Photo Credits

    • Digital Vision./Photodisc/Getty Images