Pensions, stock options, and other forms of long-term payment plans are often considered to be community property and available for division during a divorce hearing. As with other community property, if the value was earned in whole or in part during the life of the marriage, it is generally eligible to be properly divided between the parties.

Most pension and retirement plans are governed by federal law and receive special tax treatment. Contributions generally enter into the plan prior to paying taxes, allowing the plan’s money to accumulate without current tax. The court issues the Qualified Domestic Relations Order (QDRO), a special order served upon the plan’s trustee, that defines how much of each payment goes to the spouse.

Many businesses offer stock options as a form of compensation or in lieu of additional compensation. Particularly in highly entrepreneurial firms, stock options can often be more valuable than the monetary compensation due to their high potential. In the case of divorce hearings, stock options are also generally available for division. However, because of vesting plans, the asset divisions can often be complicated. Any stock options earned during the course of the marriage will often be divided up (either the options or the value of the options) in the event of a divorce.

Many states still do not have set laws or clear rules-of-thumb for judges and courts to apply to stock options during a divorce hearing. Because of this grey area, options are often treated differently from other forms of property. One factor that complicates things further is the overall vesting period that is bound to most stock options, as well as the amount of stock that has currently been vested. For example, the typical vest period is set to 3 – 5 years and requires continued employment with the same company. How do these factors play into divorce? Let’s look at an example.

Assume the wife was granted options for 1,000 shares of her employer’s stock, set to vest over five years beginning on January 1^st. While the value of the options went way up, the couple separated on December 31^st of the same year. In order for the options to be exercised in full, she must stay at the same company for four more years. The company, knowing she holds valuable options, might opt to pay her below market rate. In this case, the court must decide whether to award options for 500 shares to her husband (a full 50-50 split) or options for 100 shares (50% of the amount vested during marriage). The court can also decide to award something in between. In short, these are issues the courts must grapple with and there is no certainty as to what the outcome may be.

Moschetti Family Law can help you through this difficult time. If you have any questions, please contact us for help in understanding how California's laws pertain to your property. Call us at (415) 399-0970 or or contact us online.

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