Considering Stock Options in Settlement Agreements

 Posted on January 22, 2014 in Family Law

Divorce can be a trying time full of anguish and stress. Creating a settlement agreement that both parties can agree on can be expensive and time consuming, especially if significant investments and other assets are involved in the division of marital assets. Couples getting a divorce must be careful to always consider stock options received from employers when drawing up settlement agreements. Oftentimes stock options are forgotten during divorce proceedings. This is a mistake, as stock options have the ability to affect the division of assets upon divorce, as well as future support awards.

What Are Stock Options?

Stock options are awards given to employees by their employer. This award provides an employee with the right to purchase company stock in the future with his or her own money. Typically, the price stock can be purchased at is dependent on the company's stock price as of the time that the stock option award was made. The characterization of a stock option is crucial. Some stock options are awarded as compensation for accepting a salary reduction. If this is the case, the income derived from such an option could be considered a forfeited wage, and thus a part of alimony support. Another way an option can be characterized is as an additional compensation benefit granted for being employed by the company. In this case the income derived from the option could be considered an investment, and thus a marital asset that should be divided upon divorce.

How Should I Consider Stock Options in Relation to My Divorce Settlement?

Stock options are often forgotten during divorce settlement proceedings. This is typically because the right to purchase stock has not yet been exercised. As a result, it is sometimes difficult to understand whether a stock option has any monetary value. Instead of ignoring stock options, you and your spouse must determine whether the stock option is characterized as a forfeited wage, and thus alimony, or whether the stock option is simple additional compensation, which must be divided as a marital asset. The first step is to determine whether any stock option exists by reviewing old employment documents and contracts. If such a contract exists, the characterization and value of the stock option must be determined. Lastly, one must also determine if the option is for restricted stock. With stock options the employee can typically only purchase the stock if the original award price is lower than the current stock price. In contrast, restricted stock options are those in which the employee can only take ownership of stock on the vesting date contained in the award, even if the grant price is higher than the current stock price.

Coming to a divorce settlement can be a trying and expensive process, especially when significant marital assets are involved. Make sure that when a divorce settlement is drafted, that you are including stock options awarded to you or your spouse. Contact the family law attorneys here at Law Offices of Cosmo Tedone and Barbara Morton, P.C. in Joliet, Illinois, for assistance with drafting your divorce settlement, or any other family law issues.