Month: January 2016

Clients often wonder whether they will have to divide their unvested stock options as part of a divorce property settlement. These are the stock options that were awarded during the marriage, but are not allowed to be exercised by the employee until a date in the future, presumably after the divorce is final.

It is crucial that both parties are fully informed about the grant dates and nature of the stock options when determining the value of the marital portion of the asset. A comprehensive company description of the option plan and calendar of granting and vesting dates, as well as the number of shares and price the employee must use to exercise the option, must be made available to the non-employee spouse to review with his or her attorney. In addition, it is important to determine if the options were granted for services to be rendered after the divorce.

Generally, if the options were granted during the marriage, they are considered marital property because the employee has the right to buy the stock at a fixed option price and then sell the shares at the current higher stock price to make a profit. With already vested options, it is easy to determine their value by looking at the fixed grant price and comparing this price to the current stock price. The difference multiplied by the number of shares is the current value of the vested asset.

But what about granted, though unvested stock options? What happens if these options were granted during the marriage, but will vest and be exercisable in the future, after the divorce? And what if the parties are separated but still married at the time the grant occurs?

Other distinctions include whether the option is performance or incentive-based. It is arguable that incentive-based options, which motivate a person to stay employed at the company, are not based on the employee’s contribution but on some future performance after the divorce. Since some options are granted for service that will occur after the divorce, the employee may feel that the ex-spouse did not contribute to the acquisition of the post-divorce portion of the asset. Fortunately there are ways to discount the future options in the interest of fairness.

If the stock options are going to be off-set against other assets, the unvested options granted during the marriage and based on performance during the marriage can be given a lesser present value than the vested ones by use of a formula which takes the future, post-divorce vesting date(s) into consideration.

Often the uncertainty of whether the employee-spouse will stay employed long enough for the unvested options to actually vest makes it risky to off-set any granted though unvested options against other marital assets. In that case, the parties can consider dividing the proceeds in an allocation that is fair to both, “if and when” the options get exercised.

Tax consequences have to be considered as well, since the exercise of a stock option affects the taxable income of the person who owns the option. Sometimes the company Plan prohibits the transfer of the options even as part of a divorce. But if the options can be transferred to the non-employee spouse to exercise in the future, that spouse will owe the taxes, according to the IRS. With any complicated asset such as stock options, it is important to consult with an accountant regarding the tax implications of exercising or transferring the asset.

Clients often ask their lawyers this question and the problem is that each case is made up of a unique set of factors that judges can consider when fairly dividing the marital property.

So many divorcing couples think they have to go to court to get a fair resolution, or any kind of resolution, to these types of issues.

However, going to court (i.e., a litigated divorce) can result in unexpected property divisions, no matter how skilled and experienced your lawyer might be in arguing your case. Therefore, in these matters, one cannot say exactly what you or your spouse is entitled to according to the law.

So, divorcing couples might consider instead thinking about what they, individually and/or together, believe is a fair result, given all the facts and circumstances. If one spouse stayed home and managed the children and household and entertained for fifteen years so that the other spouse could devote all waking hours to increasing the value of a pre-marital business, then perhaps the increase in value should be subject to division, at some reasonable percentage.

I would recommend, if you want to have some control over the outcome of the division of property, you should consider using either Collaborative Divorce or Divorce Mediation,  both of which seek to obtain an out-of-court settlement cost effectively and with privacy. 

No. Some property may not be subject to division, if it is “separately owned.” 

Under Tenn. Code Ann. 36-4-121(b)(2) separate property is generally set aside and excluded from being divided in a divorce. Only marital property is subject to division.

Separately owned property may include assets such as: an inheritance, or a gift specifically to one spouse, or a personal injury award,  even if received during the marriage.

It may also include an IRA (converted from a 401k) and/or retirement plan from employment prior to the marriage. Likewise it can include interests in a separate business owned by one spouse prior to the marriage, one that the other spouse does not participate in directly.

In practice, however, the law often is not “black and white” as to whether an asset is marital or separate. There are many distinctions made based in notions of fairness.

Many times what started out as separate property ends up as marital property in nature.

This happens, for instance, when the spouse who did not own the property before the marriage, contributes significantly to the preservation and/or appreciation of the asset during the marriage.

For example, one spouse worked part time on the family farm that the other spouse inherited. Or, both parties contributed to the repairs and taxes of an inherited vacation home. 

Or, an off-site business owned by one spouse before the marriage was made more successful because the “stay-at-home” spouse managed all of the family finances, or took care of the children, or entertained the other spouse’s business clients for many years.

Also, consider a pre-marital IRA worth $100,000 on the wedding date which appreciates to $200,000 during a long marriage. Through there was no direct effort of that spouse in causing the appreciation, it may also be subject to division due to the long marriage.

Finally, it is worth noting that how one asset is divided (or not) could affect whether another asset will have to be divided.  For example, if the family home or business is not going to be sold and divided, then some other asset may have to be sold and divided to accomplish a fair settlement.

These situations illustrate there are many factors that need to be considered before the property divisions in divorce are determined.

Leaving these kinds of decisions up to the court, as in traditional litigated divorce, makes it hard to predict how a judge will rule, since each case is unique and judges have wide discretion to determine what is fair in these matters.

When an out-of-court settlement is reached by means of thoughtful negotiations with advice of a neutral financial expert (such as in the Collaborative Divorce process) it is highly likely to find the division of property that works best for both parties.

Every Tennessee divorce requires dividing up of the property you and your spouse have accumulated during the marriage, so you have to know what there is and how much it’s worth in dollars. In other words, when you are divorcing, each piece of property will get translated into a dollar value to make it easier to divide the property fairly.

Real estate, most automobiles and financial assets (e.g.,  business interests, retirement plans, stock options), must be appraised.  Their values may be estimated informally when the parties agree and it is appropriate to do so.

When evaluating the martial estate, many people do not realize that they have to subtract the debt associated with any piece of property, as well as any credit card or personal debt. So, for example, if your house is worth $500,000, but you still owe $300,000, the appraised value of that particular asset for the purpose of dividing up in the divorce is not $500,000, but rather $200,000.

When the total martial estate is evaluated, the sum of all asset values is off-set by the sum of all debt still owed. For more information on handling debt in divorce, please see TN Law Topics on the Division of Debt on this web site.