How are Stock Options Divided in an Arizona Divorce Case?
As many are aware, an employee may receive Stock Options or Restricted Stock Units from their employer as a form of compensation. A stock option provides the employee an option to purchase company stock at a stated price, referred to as the “strike price“, at a given point in time.
Typically, the options have a vesting period. For example, an employee may be granted 1000 stock options that vest equally over four years such that each year 250 of the options vest until the passage of four years at which time all 1000 options are vested.
If the market price of the stock is higher than the “strike price“, the employee can turn the stock back to the company and be paid the difference between the “strike price” and the actual market value of the stock. Alternatively, the employee can continue to hold the stock to see if future appreciation will provide the employee with a greater profit from the stock.
The main difference between a stock option and a restricted stock unit is that the employee actually owns the company’s stocks that were granted under the terms of the stock option plan. They can sell them or they can hold them as long as they wish. A Restricted Stock Unit, however, is different.
Similar to stock options, a Restricted Stock Unit will have a “strike price” and a vesting schedule. However, unlike a stock options the employee does not actually own the stock when the Restricted Stock Units vest.
Instead, the employee is simply entitled to cash in the difference between the “strike price” and the current market value of that stock. Many Restricted Stock Units also have a date by which the employee must elect to exercise the cashing in of the Restricted Stock Units after which time they are deemed void.
Both Stock Options and Restricted Stock Units are taxable income. As a result, you must take into consideration the income tax effects of these assets when dividing them in an Arizona divorce. Almost all employee benefit plans contain language providing that these stock options cannot be transferred, which means the court has no authority to order the company to rename the Stock Options or Restricted Stock Units in the name of the non-employee spouse.
In such circumstances, it may be wise to have the employee spouse hold the non-employee spouse’s share of those Stock Options and Restricted Stock Units in a constructive trust with detailed language included to protect the non-employee spouse.
One of the more complicated aspects of dealing with Stock Options and Restricted Stock Units is understanding the terms of the Stock Option and Restricted Stock Unit plan to identify the community property interest in those assets that have not fully vested. It is equally important to know whether the assets were granted to the employee as a reward for past performance or, instead, as an incentive to continue employment into the future.
Arizona court’s lacked guidance on how to address Stock Options and Restricted Stock Units until the Arizona Court of Appeals addressed the issue directly in the case of Brebaugh v. Deane.
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