September 10, 2020

Options and Restricted Stock – Divorce Pitfalls

Businesses can reward and retain valuable employees by giving stock options or restricted stock.  With a stock option, the employee has the right to buy stock in the employer at a specified price.  If the market price is higher, the employee makes money by exercising the option and selling the stock.  An employee with restricted stock has possible dividend income and an ownership stake in the business. 

Increasingly, employees at all levels, not just executives, are receiving these “stock benefits.”   Experts predict stock benefits will become even more popular as employers strapped for cash due to the pandemic turn to other ways to reward and retain employees.  Because they can have substantial value, they can play an important part in the divorce settlement.

Valuing them is often difficult because they are usually subject to restrictions or the benefits accrue over a number of years.  They may be forfeited if employment is terminated or become worthless if the employer goes out of business.  So, there is risk in reliance on them in divorce settlement negotiations.

Most stock benefits can’t be transferred outright by the employee to their spouse.  For the non-employee spouse to get value from the benefit, complex arrangements need to be made and then carefully crafted and clearly detailed in the divorce agreement.

Taxation is another potential pitfall.  Stock benefits may be taxed at different times (when the benefit is exercised by the employee or the stock is sold) and different rates (ordinary income or capital gains).  A thorough understanding of taxation rules and a well-written agreement are needed so that the tax burden is where the divorcing spouses agreed and expected it to be.

Stock benefits sometimes don’t appear on paystubs or tax returns and rarely provide immediately usable cash that can fund a divorce settlement.  They can easily be overlooked or deliberately not disclosed.  If you want to avoid leaving money on the table or, worse, having expectations of financial security thwarted, it is smart to use the services of qualified legal and financial professionals to look for, account for and divide stock options, restricted stock and other forms of employment stock interests.  Bottom line:  dealing with employment stock benefits is not a “do it yourself” project.

This article first appeared in the September 3, 2020 edition of The Cheshire Citizen.

« Back to all news