Stock options in divorce

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The concept that the option might have been granted in some capacity as a reward for past work can complicate the analysis of labeling options as marital or separate. Contemplate a situation where a spouse was granted an option after separation. If the option was in some part compensation for work completed during the marriage, at least a portion of the option would be considered marital. Similarly, if an option was granted shortly after marriage, for work done before the marriage, a portion of that option would be considered separate, and not subject to distribution.

Stock Options and Divorce: How are options divided in a

After application of either time rule, the couple will know how many options each are entitled to. The next step then would be to figure out how to distribute the options, or their value.

Stock Options In Divorce | Illinois Divorce Lawyers

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Dividing Stock Options And Restricted Stock In Divorce

Although not a common method to value a stock option, a North Carolina court has held the “coverture fraction,” typically used to value qualifying retirement plans, may be used to value stock options. This formula divides the length of time a spouse was simultaneously married and contributing to the earning of the stock options by the total length of employment during which the options were earned.

What You Need to Know About Dividing Stock Options in Divorce

Once the court has decided how much of the stock options, if any, are marital property, then the court has to determine the value of the stock. Probably the most difficult task for attorneys and the court is placing a certain value on the stock options. The reality is that no one knows how much or how little the stock options will be worth when the employee spouse exercises the options. No future value is guaranteed. Plus, if the stock options are not vested, the value becomes even more uncertain and difficult to determine.

Finally, the court has to determine how to equitably divide the stock options based on all of the marital assets. Depending on the situation, the court may be able to order the employee spouse to cash out the stock options in order to compensation the other spouse, or other assets may be used to compensate the other spouse for the value of the stock options.

What happens with a divorce-related transfer of vested employer stock options from the employee spouse to the non-employee spouse pursuant to a divorce property settlement? Good question. Read on for the answers.

Evidence of the value of the stock options must be presented to the trial court. The value is often measured by a pricing model, which takes into account the stock price, the exercise price, the maturity date, the prevailing interest rates, the volatility of the company's stock, and the company's dividend rate. Another acceptable method of valuing options is the intrinsic value method, which determines value by subtracting the option price from the fair market value of the stock.

Dividing stock is not the same as dividing business and marital assets in a divorce. Once determining that there is stock, the type must be clarified as well. It is important to know that there are two kinds of stock, options and restricted.

The Black-Scholes model is another approach to placing a value on a stock option. Unlike the Intrinsic Value Method, this model is complicated and typically requires a professional, such as a forensic accountant. This model produces a theoretical estimate of the value based on derivative investment instruments. It considers numerous additional factors, such as the historical price of the stock, the strike price, and the vesting schedule.

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