Dividing Employee Stock Options in an Arizona Divorce

Arizona is a community property state, which means that all income and assets of each spouse acquired during the marriage are divided equally during a divorce. This includes compensation a spouse receives from an employer in the form of stock options or restricted stock units, which are entitlements to shares of company stock. Dividing these complex assets involves special considerations.

Stock options allow the employee to purchase a number of shares at a stated price at a specified time. Restricted stock units (RSUs) give the employee the right to the cash out the market value of granted shares at a future date, usually after the employee has been with the company for a minimum length of time.

Employees do not receive their options or RSUs immediately. These benefits, once granted, are vested according to a schedule. For purposes of asset division, the question becomes whether vesting occurred during the marriage. If so, the options or RSUs are generally considered community property. If vesting occurred before marriage, they are usually separate property.

A more difficult question is whether options and RSUs received during the marriage but not vested at the time of divorce are community property. The answer depends in part on the employer’s intent in granting these benefits. If they were meant as compensation for past performance, they will likely be treated as community property. But if they were meant as an incentive for future performance, they will probably be considered separate property. Courts follow distinct formulas for allocating spousal rights to unvested stock options and RSUs in each of these situations.

Another major issue in dividing options and RSUs is valuation, which requires unique methods. Stock option values fluctuate depending on the profitability of the company. In the same way, RSUs have no definitive value until the employee cashes out for the current market value. The date of valuation is also important. Options vested during the marriage are generally valued as of the date of separation, while unvested options may require assistance of financial experts.

Once the allocation of spousal rights and the valuation are settled, the assets themselves must be divided. Three basic methods are possible:

• Buy-out — The employee spouse buys out the non-employee spouse's share based on the determined value of the options.
• Offset — The community property interest in the options is offset by awarding the non-employee spouse other marital assets of equivalent value.
• Equal division — In some cases, direct equal division of the options may be feasible.

Any exercise of stock options will trigger tax consequences. The timing and method of exercising options should be carefully considered to minimize tax burdens. In addition, any property division agreement should clearly address tax liabilities associated with the division of these assets.

At Clark & Schloss Family Law, P.C. in Scottsdale, we advise Arizona residents about the particulars of division of marital property in a divorce. Call us at 602-789-3497 or contact us online to arrange your consultation.