How Are Stocks Divided Upon Divorce?

When you decide to get a divorce in California, you will need to divide your assets equally with your spouse. Some of these assets can be easy to designate, such as pieces of property and cash. However, one of the more difficult items to divide is your stock options. You often receive these stock options from your employer, but if you acquired them during the marriage, you have to consider how to divide them.

What Are Stock Options?

You and/or your spouse may each receive stock options from your employers. Stock options give an employee the right to purchase stock at a later time and for the price specified in the option. While these options provide you and your former spouse a great way to collect funds in the future, stocks may present a challenge during divorce proceedings.

One of the most important considerations that you make when determining how to divide a stock option is if the stock is vested or unvested. Vesting refers to the transfer of full ownership of a stock – for example, your company gives you full control of the stock with no stipulations. If the stock is unvested, your company sets aside a certain amount of stock for your use, but you have to meet certain conditions before you can receive full ownership of the stock.

Marital Versus Separate Stock Options in California

Under California law, the state considers all property that you acquire over the course of your marriage to be community property and therefore subject to division during negotiations. If you receive stock from your employer and that stock vests while you are married, it is community property. You and your spouse are each entitled to a one-half distribution of this stock option in negotiations.

Challenges arise if you receive the stock while you are married, but your employer does not vest the stock to you until after your date of separation from your spouse. Since you did acquire the stock option during the marriage, it is still community property and you may still have to award a portion to your spouse. This process can involve two calculations, either the Marriage of Hug formula or the Marriage of Nelson formula.

The Marriage of Hug Formula and Stock Options

First, the court will determine what your employer’s primary intent was in awarding you the stock options. The court may determine that the stock option rewarded you for past services. In this case the court will use the Marriage of Hug formula to determine the portion you may have to give to your spouse. Your stock options will be considered deferred compensation – and therefore community property earnings.

To determine the community portion of your stock, the court will multiply the value of your stock by a fraction. This fraction will be the total number of years you worked at the company until you received the stock option compared to the total number of years you were married. The community portion will be evenly divided between you and your spouse.

The Marriage of Nelson Formula and Stock Options

If the court determines the stock option was intended as an incentive for you to work or to continue working for the company, the court will calculate the community portion using the Marriage of Nelson formula by determining the community portion by a different fraction.

This fraction is the number of years between receiving the award and the date when you exercised the stock option, and the number of years you were married. You and your spouse will each receive one-half of the community portion.

To protect your interests and stock options during your divorce, hire a San Diego divorce attorney to assist you with these negotiations.