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Executive Benefits And Divorce

Author My Divorce Solution

Published on: May 7, 2025

The right granted to an employee to buy a certain # of shares (exercise) at a point in the future (vesting date) at a specific price (the grant price).
Designed to reward and retain key employees, who may be motivated t stay long term to get full value of options which vest over time.
Risk in unexercised options: value may increase or decrease significantly.
Risk during vesting period? No investment made or obligation, but could be part of settlement.
Can be offered to non-employees: suppliers, consultants, lawyers and promoters for services rendered.

Important Terms: Stock Options

Exercise: to exchange the option for actual shares
Grant Date: when it becomes property
Grant or Exercise Price: price at which stock may be purchased
Vesting Date: when the employee may use the option to buy stock.
Vesting schedule: the % or # of options exercisable over time
Unvested: vesting date not yet reached
Expiration Date: last date an option can be exercised; lost/forfeited after (10 years is common)
In the Money: fair market price > grant price
Underwater: grant price > fair market value

Type	Taxation	Transferable?
Incentive Stock Options (ISO)	Not considered income at grant or exercise. Profit is a capital gain: long term if held 2 yrs. from grant date and 1 yr. from exercise. May create Alternative Minimum Tax (AMT) liability.	No. If transferred, the option would become “nonqualified”. (The stock could be transferred after exercise).
Non Qualified Stock Options (NQSO)	Taxed as ordinary income at time of exercise. May incur long or short term capital gains tax when stock is sold.	Yes, may be transferred from employee to ex-spouse (check plan documents). Ex-spouse exercising the option is liable for income tax.

Incentive (Qualified) Stock Options

Not transferable as qualified – become nonqualified if transferred

Most plans do not allow transfer

No Tax Upon Exercise

LTCG if Held at least 2 Yrs. from Grant Date and 1 Yr. from Exercise Date
May Create AMT upon Exercise – Dual Cost Basis Tracking

Limited by IRS to $100,000 per year of aggregated vesting of ISOs. Remaining options will be granted as NQs or will be treated as NQs for tax purposes.

Most companies track this when granting yearly options, and may grant a mix of ISO and NQSO for this reason.
Occasionally companies may cancel some ISOs and grant NQs to replace their value in order to comply.

Nonqualified Stock Options

No taxation at grant

Exercise generates ordinary income

Divorce-Specific Considerations:

May or may not be transferable (see plan)
No Tax Consequences from Transfer to Spouse (Alternate Optionee)
“Alternate Optionee” receives 1099
If Not Transferable, Employee Must Exercise on Behalf of Spouse

Stock Options: Documents

Stock option plan and amendments
Grant agreements between employer & employee
(annual letter)
Summary statement reflecting status of each grant,
including vesting, exercise and sales (quarterly or annual
statement)
History of stock price and dividend payments

Plan Document

Sets out:

Reason for Equity Compensation
What Type(s) of Option/Restricted Stock/Stock Appreciation Rights
Vesting Period and Schedule – or left to grant notice

The Grant Award Notice

Grant Type and # or ID
Which plan governs the grant
# Shares
Grant price if option, Performance Criteria or any other Consideration
Vesting Schedule
Expiration date

Account Statements

Will Include:

Grant Date
Type of Option
Grant Price
# Shares Granted
# Outstanding (not yet exercised)
# Exercisable (vested)
Expiration Date

Grant Repricing

If shares are “underwater”, company may re-price grant
Vesting schedule changes and starts on date of new grant price
Employee is given a choice whether or not to accept repricing
Marital portion may be impacted by new vesting schedule; non-employee spouse must sign off on repricing during divorce

Option Exercise Methods

Regular – Pay Cash
Cashless – Turn in Portion of Options; Get stock shares
Cashless and simultaneous sale – As above and immediately sell shares for net cash
Stock Swap – Turn in Previously Exercised Stock – tax basis remains that of swapped stock – be very careful to know that basis

Confirmation Statement

Includes the following for Exercised Options:

Date of exercise
# of options exercised at each date
Grant Price
Market Price
How options were paid for
Taxes withheld
Net proceeds or shares

Transaction History

Shows the following for Exercised Options:

Date of exercise
# of options exercised at each date
Trade Price
Market Price
Proceeds (Gross or Net)

Stock Account

Shows:

Transaction of exercised stock coming into account and sale
# of shares of previously exercised options that are still owned
Cost Basis of Stock. Was stock acquired with a stock swap? If not, it is market price at exercise.

Option Exercises: Corporate Insiders

May be subject to blackout periods and volume restrictions – if employee is exercising on behalf of spouse, that restricts spouse as well
Creation of 10b5-1 exercise/trading plan solves restriction problems
Sells a predetermined number of shares at a predetermined time; avoids accusations of insider trading.

Determining the Marital Shares

In mediation or collaborative, parties can agree to custom division. Judges also have latitude.
Most states count any options granted and vested during marriage as marital property
Unvested shares or those granted before marriage usually are apportioned by a time rule
Popular time rule formulas: HUG, Nelson

HUG Formula

Used to attract new employee and reward past service
Formula: # Days From Date of Hire to Date of Separation DEVIDED BY # Days From Date of Hire to Date of Exercisability

Nelson Formula

Intended as compensation for future service and to retain employees
Formula: # Days From Date of Grant to Date of Separation divided by #Days From Grant to Date of Exercisability

Tracking Proceeds from Exercised and Sold Shares

Determine % proceeds that were marital and separate property

Determine use of proceeds If necessary, apportion taxes withheld and additional taxes paid at tax time

Buyout or Divide Shares?

Dividing options shares risk, reward, taxes

Valuing options provides ability to offset another asset
As in any “buyout” (alimony, pension plan), there is risk, but it may be what clients want or the only choice

Valuing The Options

“In the money value” = Difference between market price and grant price; not best indicator of option value

Black-Scholes Formula

Expiration Date, Stock Price, Grant Price,
Stock Volatility, Risk-Free Rate of Return;
May agree on haircut for forfeiture risk

Binomial Formula

Similar to Black-Scholes but considers varying exercise dates

Dividing and Distributing the Options

Deferred Distribution

Divide the marital options to be exercised:

If plan allows, set up account for non-employee spouse
Otherwise, employee exercises on behalf of non-employee spouse

Note on taxation: in Notice 2002-31, the IRS indicated that when nonqualified stock options were transferred pursuant to a divorce order, FICA is payable by the employee on all of the options, including those transferred to the former spouse.

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Non-transferable NQ Option Exercise

Employee is taxed as wage income

Income can be allocated between parties OR

Tax return of employee can be prepared WITH and WITHOUT option income and withholding from exercise for non-employee spouse – Difference in taxes is attributable to out-spouse’s exercises – this is still taxing out-spouse at employee rate, so it is not precise.

Do not apply the employee’s marginal tax rate to non-employee spouse’s exercises. That may overtax the ex-spouse as it ignores any deductions or other factors affecting either party’s actual taxes

Restricted Stock Units and Awards

Stock or stock rights granted to employee by employer
Usually no or very low cost to employee
Has vesting schedule
Not transferrable to non-employee spouse
Taxed as ordinary income upon vesting
Less risky than options – rarely worthless

What are the restrictions?

A period of time before vesting, intended to prevent employees from “walking away”
“Market standoff provision“: may not sell for a certain period of time (usually 180 days) after an initial public offering (IPO)
“Blackout” dates, usually cannot sell around quarterly earnings

Restricted Stock: RSUs and RSAs

Released automatically at vesting; no action need be taken by employee
Most employers sell enough shares to cover withholding taxes and release the Net Shares – Gross amount immediately included in W-2 income
Taxes can be allocated between spouses the same way as with stock options

Sale of Stocks Released as Restricted

Once shares are released, stock may be sold simultaneously or held
Cost basis is value at time of release
If held for < than 1 year from release, profit is taxed as short term capital gain
If held for ≥ than 1 year, profit is taxed as long term capital gain

Performance Grants

Can be NQs, ISOs, RSUs or RSAs
Are tied to specific performance criteria: revenue; performing relative to other departments; performing relative to other benchmark (S&P 500)
More or less shares may vest than granted depending on performance

Stock Appreciation Rights

The right to the increase in value of a specified number of shares over the grant price over a specified period of time
Has vesting schedule
Can be paid in cash or shares when vested
Taxed as ordinary income at exercise
If issued in stock, short or long term capital gains upon stock sale

Equity Compensation and Support

Unless otherwise agreed, equity compensation that has not been divided as marital property, is usually includable in income available for support
Restricted stock is income when it is released at vesting
Options may be includable when vested

Family Law Software Comments

It’s “complicated”
“Restricted” and “unrestricted” stock options are entered as “Cash & Investments.” Discount for the restriction is “more art than science.”
Unvested stock options are entered as an Investment that pays no interest or dividends (but that may have a rate of appreciation in value). You enter and/or define the expected rate of appreciation.
Tax effects of options and RSUs are reflected using the “Property After Tax” worksheet. For an RSU, non-qualified option, qualified option, ISO, or any other special equity, you would calculate (guesstimate) the “percent paid in tax” outside the software and override that entry for that item on this worksheet.
If the AMT applies only because of the stock exercise, you currently can not get an accurate tax result from the software. You will have to figure the tax separately and override the tax result. You can get into the general range, however, by assuming AMT does apply.

Nonqualified Deferred Compensation Plans

Far less common than stock options
Employer defers a portion of income – reducing current tax burden – to the future, presumably retirement
Employee may choose deferral %
Different types: may resemble a 401(k), defined benefit (pension) plan, or stock purchase plan
SERP (Supplemental Executive Retirement Plan), aka “Top Hat” plan is one type
Unfunded plans means benefits not guaranteed (but highly likely!)
Cannot be split by QDRO

Special Perks

Lifestyle/budget factors

Company car
Club memberships

Special cases

Forgivable loans
Low/no interest loan

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Types of executive compensation

Questions to keep in mind

Incentive Bonuses

Equity Compensation

Employee Stock Options