How Are Stock Options or Stock Units Divided in a Divorce?

Dividing marital assets in a divorce can be challenging, particularly when those assets include stock options and stock units. By working with an experienced divorce attorney, you can achieve a fair distribution and protect your financial future. 

What Is the Difference Between Stock Options and Stock Units?

Stock options and stock units are both forms of equity compensation but differ in structure, taxation, and how they provide value to employees. Here’s a breakdown of the key differences:

Stock Options

• Definition: Stock options give an employee the right (but not the obligation) to purchase company stock at a predetermined price (the exercise price) after a vesting period.
• Types:
  • Incentive Stock Options (ISOs) – Often granted to employees, with potential tax advantages if certain holding requirements are met.
  • Non-Qualified Stock Options (NSOs) – Can be granted to employees, consultants, or board members but are subject to ordinary income tax at exercise.
• Vesting: Employees must meet specific tenure or performance conditions before exercising their options.
• Tax Treatment:
  • No tax is due when stock options are granted.
  • Taxes are triggered when the options are exercised (and potentially when the shares are sold, depending on the holding period).
• Risk: The options may become worthless if the stock price does not rise above the exercise price.

Stock Units (Restricted Stock Units – RSUs)

• Definition: RSUs are a promise to deliver shares of stock (or cash equivalent) after a vesting period, without requiring the employee to purchase them.
• Vesting: Employees must typically meet service or performance conditions to receive the shares.
• Tax Treatment:
  • Taxable as ordinary income upon vesting (unlike stock options, which are taxed at exercise).
  • Employees do not have to purchase the shares but owe taxes on their value at vesting.
• Risk: RSUs always have value upon vesting, representing actual shares, whereas stock options may lose value if the stock price remains below the exercise price.

In sum, RSUs are generally more straightforward and more predictable, while stock options provide the potential for higher upside but with more risk.

How Do New York Courts Divide Marital Property?

New York is an equitable distribution state,  which means the courts divide property in a way that is equitable or fair to both spouses. But this is not an equal 50/50 split. The exact manner in which property is distributed depends on the couple, their circumstances, and other factors.

Marital property is the only type of property up for distribution in a New York divorce. This property encompasses the property and assets spouses acquire during the marriage. Any property that belonged to either spouse before they entered the marriage is separate and, therefore, is not subject to distribution. 

Dividing Stock Options and Stock Units 

First, determine whether the options or units are marital or separate property. Stock options and stock units acquired during a marriage may be considered marital property subject to distribution based on the vesting schedule:

• Unvested shares, which require a spouse to continue working at the company or are based on hitting certain milestones, may be partially or entirely separate. 
• Unexercised stock options may not be marital or worth exercising and dividing using other marital property during divorce. 

To proceed with distribution, you must assign a value to the options and units. There are several ways to determine the value of stocks, depending on whether they are for publicly traded or private companies. Sometimes, accountants are brought in to calculate the marital versus separate components of a stock plan based on the percentage of the shares that have vested or remain unvested.

Based on the circumstances, dividing the stock options and units can be challenging. However, in some cases, instead of dividing the stocks themselves, which could trigger adverse tax consequences, the non-employee spouse may agree to some other asset of the same value. However, capital gains taxes must also be considered.

Talk to a New York  Divorce Attorney Today

Dividing stock options or units can be tricky, but a skilled divorce lawyer can handle this critical part of a divorce to reach the fairest resolution. The divorce attorneys at Aiello & DiFalco guide clients through the challenges of divorce, working diligently to represent their best interests. Contact us today to explore your options.