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Dividing Stock Options in a Divorce

Other articles have discussed many different types of retirement plans that you might have. Be sure to read our Ultimate Guide to Texas Marital Property Law. In your divorce, your retirement plans will probably be subject to division. Understanding if and how these plans will get divided is important as you enter the divorce proceedings. Another important benefit that you might deal with in divorce is a stock option. If you have stock options as an employee benefit, it is important to understand what will happen to this benefit in your divorce. Likewise, if your spouse has stock option benefits, you need to know if you are entitled to them in divorce. 

I'll answer these questions in this series : 

  • What are stock options and restricted stock?
  • What are restricted stock units?
  • How do restricted stock award plans work?
  • Documents that you need related to restricted stock and restricted stock units.
  • Stock options as community and separate property.

Stock Options And Restricted Stock Options

dividing stock

Stock options awarded as employee benefits constitute very valuable benefits. Many managers will get restricted stock options as benefits. This award is a grant of the company’s stock. The recipient of the stock (the employee) will not be able to use the stock until the shares vest. This period of restriction is also known as the vesting period. But, after the vesting period ends, the recipient can own those stock shares outright. They can then do whatever they want with the stock shares at that point.

Restricted shares are usually awarded to employees as a benefit and also an incentive to remain with the company. This is because if the employee quits during the vesting period, or if they are terminated for some other reason, they won’t get the stock shares. This is different from a regular stock option because it requires the employee to stay with the company in order to receive the shares. Traditional stock options are valuable as the stock value grows. On the other hand, restricted stock options are valuable regardless of the company’s stock.

Restricted Stock Award Plans

If you have a restricted stock award plan, you might wonder how it works.

  1. The first step in the offering of a restricted stock award plan is to accept or deny it. If you accept the grant, you have to go through the vesting period.
    • Generally, this means that you have to wait a certain period of time before owning the stock shares. However, there are some cases where the vesting period might be contingent on your performance at work.
    • This would mean that you can get the stock when you achieve certain goals within the company.
  2. Then, once the vesting period ends, you can get either the shares of the stock, or you will get their cash equivalent. This depends on the company’s rules.
    • Either way, you will receive your award without any restrictions. Even during the vesting period, obtaining restricted stock means that the recipient receives voting rights.
  3. Once this restricted stock pays dividends, the recipient of the stock will receive these payments. This is the case even if dividends are paid during the vesting period. Dividends constitute income, meaning that the recipient of them gets taxed for them based on their normal income tax rate. This tax rate is used instead of the 15% rate unless the 83(b) election is relevant. Then, after the vesting period ends, the 15% tax rate applies.

Getting Help

This is some basic information regarding stock. In my next article, I will discuss restricted stock units (RSU), which are similar to restricted stock awards, but that differ in some ways. If you need additional information regarding stocks and restricted stocks, please contact an experienced family attorney.