If You’re Considering Divorce, Know Your Options with Stock Options
By: Catherine Shanahan, CDFA
We asked James a lot of questions. What options did you sell? When were they granted? Were they pre-marital or marital? When did they vest? Have you been calculating gains correctly when filing tax returns?
He was surprised because his attorney didn’t ask any of these questions. Poor advice, combined with a general lack of knowledge about stock options, led James to make poor, costly decisions.
Let’s dig a little deeper into common missteps so you can better understand what you need to know about stock options if you’re considering divorce.
Knowing the Tax Implications
Selling stock options to pay off marital debt is not necessarily a bad decision. However, if your accountant isn’t experienced with stock options, you can end up overpaying your taxes. In James’ case, his accountant used the grant price as the cost basis instead of the exercise price.
For example, suppose the grant price is $10, the exercise price is $40, and the sale price is $80. James was taxed on a tax gain of $70 (80-10) instead of $40 (80-40). As a result, James paid nearly twice as much as he should have in taxes.
Fortunately, most stock options were sold in 2019, so we referred James to a new accountant who will be able to file an amended return, allowing James to recover a good portion of what he overpaid – about $300,000. However, overpayments from several years prior will never be recovered.
Knowing the Grant Date
When acquiring stock options, keep a notation of the grant date. If the date is before your marriage or after your separation date, the shares are considered pre-marital. If the date is during your marriage, the date is considered marital.
James had acquired stock options before and during his marriage. He decided to sell pre-marital shares because it meant paying less in taxes. However, because pre-marital shares would have remained separate property, he could have kept those shares for himself post-divorce.
Because he was getting divorced, he would have been much better off selling marital shares. James would have paid a little more in taxes, but keeping the pre-marital shares would have allowed him to keep significantly more money in his pocket.
Knowing When Your Spouse’s Options Are Granted
Another My Divorce Solution client – we’ll call her Beth – decided in January that she wanted to proceed with a divorce. When she discussed divorce with her husband, he was adamant about separating on February 1. She agreed because she was eager to move forward.
Here’s the problem. Her husband’s employer grants stock options every year in early February. Any options he receives after the separation date will be non-marital and considered separate property.
Obviously, if you’re at risk, you might need to remove yourself from a dangerous situation as quickly as possible. If you have a choice, time your separation after stock options are granted. Make sure you know the financial impact before agreeing to a separation date.
Knowing How Stock Options Affect Equitable Distribution or Support Calculations
When you receive stock options, they’re included on your W-2 as income. You need to determine if those options should be considered for equitable distribution or support calculations. This is often overlooked because many people just don’t ask about stock options.
Of course, you probably won’t be receiving that income every year. Will that money be included for child support, for example, or do you get a portion for equitable distribution? You want to make sure you account for stock options in support calculations. This could have a significant impact on cash flow and retirement planning.
Divorce is like a swimming pool. Most people just jump in so they can get the hard part finished quickly and enjoy themselves. In some cases, attorneys looking for a quick settlement encourage this approach because they don’t see the full financial picture.
Unfortunately, you could very well end up regretting hasty decisions that you made without fully understanding the repercussions.
When it comes to stock options, lack of patience and knowledge often result in overpaying taxes, giving away options that you’re entitled to keep, or failing to account for stock options because you didn’t know they exist.
A Certified Divorce Financial Analyst (CDFA) knows what questions to ask and how to avoid these and other pitfalls. If you’re considering divorce but need help understanding the financial impact, contact us for a consultation. Let us provide you with clarity so you can make sound decisions and move forward with confidence.
Catherine Shanahan is Co–Founder of My Divorce Solution. With over 30 years of experience in the financial industry, Catherine serves My Divorce Solution Clients as a Certified Divorce Financial Analyst (CFDA) and trained mediator. A Professional Daily Money Manager, Catherine is also a former VP of the Bucks County Collaborative Law Group, American Association of Daily Money Managers, Institute for Divorce Financial Analysts (IDFA), National Association of Women Business Owners, advisory council of Support Pay,and the Association of Divorce Financial Planners.
As a mom of five and financial expert, Catherine’s experience with divorce left her wishing for better information, better resources, and a better process for the financial separation that comes with divorce. As a result, Catherine co–founded My Divorce Solution –the company she had needed in her divorce.
My Divorce Solution helps clients secure their worth and protect their wealth with the Divorce Financial Portrait. Our Divorce Preparation Platform is a data driven solution that connects your financial assets to the divorce legal system.
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