Stock Options and Restricted Stock In Divorce

by Thea Glazer, CFP®, CDFA™, MS Accounting
Glazer Financial Advisors

When dividing property in a divorce settlement, stock options and restricted stock may be thea-glazer-photopart of the marital estate. This brief overview provides a basic understanding of the factors you need to take into consideration. It does not go into all the many tax and technical issues that are aspects of equity compensation. Seeking professional guidance for your specific circumstances is always a good idea.

Many companies grant their employees equity compensation in addition to their salaries, commissions and cash bonuses. Equity compensation is non-cash compensation representing a form of ownership interest in a company. Among the most common are employee stock options and restricted stock or restricted stock units. In divorce, stock options and restricted stock are property to be divided. The employee’s separate shares are often also considered as income in the calculations of support.

Employee Stock Options (ESOs)

An employee stock option is the right given to an employee to purchase a specified number of shares of the employer’s stock for a specified price and for a specified time. There are two types of ESOs, Incentive Stock Options (ISOs) and Nonqualified Stock Options (NQs). The primary difference is that ISOs have an advantageous tax treatment explained below.

Stock options have a Grant Date, Exercise Price, Vesting Schedule and Expiration date. Example: Company ABC grants John Smith 3,000 nonqualified options on January 4, 2015 at a grant price of $10.50, a four-year annual vesting schedule and an expiration date of January 4, 2025. That means that John can exercise (buy) the 750 shares of stock annually on January 4 from 2016 through 2019. He does not have to exercise any shares until January 3, 2025. If he doesn’t exercise by the date of expiration, they will expire and be worthless.

Taxation of stock options

Nonqualified stock options are taxed at the time of exercise as ordinary income. The amount taxed is the difference between the grant price and the fair market price. Most companies sell enough shares to cover the withholding tax and release the net shares or proceeds if the shares were simultaneously sold. If the shares are held once exercised and sold later, there may be capital gains tax as well. Unless shares are about to expire, most people exercise and sell simultaneously.

Incentive stock options are not taxed when they are exercised. If the shares are held for at least one year from exercise and two years from grant date, the gain is taxed at the advantageous long term capital gains rate.

Restricted Stock (RS) and Restricted Stock Units (RSUs)

Unlike stock options, restricted stock and restricted stock units are actual stock. There is usually no purchase price and, if there is, it is very, very nominal (one cent). Holders of restricted stock have voting rights while holders of restricted stock units do not. Restricted stock units cannot be “underwater” which happens to options when the grant price exceeds the fair market price so they are much less risky. Grants of restricted stock usually have about one-third as many shares as do options. Restricted stock grants have a grant date and vesting schedule. There is no expiration date and usually no grant price.

Taxation of restricted stock

Once a share of restricted stock vests, it is released. Upon release, the fair market value less any purchase price is taxed as ordinary income. Most companies sell enough shares to cover the withholding taxes and release the net shares. There is no decision making needed by the employee like there is regarding when to exercise options. Once restricted stock vests, it is automatically released. Many employees continue to hold the net shares until a time they need the cash, feel the stock has reached a good selling price or want to diversify their portfolios.

Transferability of stock options and restricted stock

Some plans allow NQs to be transferred to the former spouse of the employee, but the majority do not. It is very rare to see ISOs transferable. If they are transferred, they may lose their status as ISOs and fall under the tax rules for NQs.

RS and RSUs are not transferable.

For non-transferable shares of options or restricted stock, the employee holds the shares on behalf of the nonemployee spouse and exercises on his/her behalf or transfers released shares. There are IRS acceptable ways to allocate the taxation so the nonemployee spouse is taxed at his/her rate rather than that of the employee.

Division of equity compensation in divorce

Both stock options and restricted stock shares are divided by formulas. The most commonly used ones are Nelson and Hug.

The Nelson formula is Date of grant to date of separation ÷ Date of grant to date of exercise or release

The Hug formula is Date of hire to date of separation ÷ Date of hire to date of exercise or release

The reason the grants were awarded determines which formula is applicable.

Valuation of stock options and restricted stock

It is rare to value the options rather than to divide the shares. That is because the value is constantly changing so it is imprecise at best. In order to correctly value the options, the following factors are the elements of a complex formula, the Black-Scholes formula:

  • Grant price
  • Grant date
  • Date of expiration
  • Vesting schedule
  • Current stock price
  • Volatility of the stock price

Sometimes valuing the options is the only way to effectuate the property division by offsetting another asset. However, dividing the shares divides both the risk and reward to both spouses. I believe it is preferable when possible.

Collaborative Divorce Offers Flexibility

In collaborative or mediated cases, there is far more flexibility in dividing assets. Unequal divisions are also acceptable if the parties agree and have reasons to do so. In court, such flexibility is not nearly as possible. This is another great reason to consider alternative dispute resolution such as collaborative divorce to allow you to make the best decision possible for your circumstances, rather than a decision forced upon you by a judge.

ESPN Radio 1700 AM Features “Divorce Options” Discussion

Real Estate Radio on ESPN AM 1700 San Diego

Collaborative Family Law Group of San Diego member Shawn Weber, Certified Family Real Estate Radio on ESPN AM 1700 San DiegoLaw Specialist attorney with Brave Weber Mack, recently appeared as a guest on “The Real Estate Radio Hour” on ESPN Radio 1700 AM to talk about the new “Divorce Options” program. Weber reviewed the different choices facing families when considering divorce, and explained how the new workshop program helps individuals understand the options and the differences among them.

Hear the entire interview with Shawn at this link.

Inaugural San Diego “Divorce Options” Workshop Offers Information, Choices

San Diego’s inaugural “Divorce Options” workshop on Oct. 22 brought the acclaimed program developed by Collaborative Practice California to individuals seeking information about their choices regarding divorce.

The San Diego Divorce Options team (L to R): Shawn Weber, Meredith Lewis, Frann Setzer, Anna Janda, Anna Addleman." width="800" height="589" /></a> The San Diego "Divorce Options team (L to R): Shawn Weber, Meredith Lewis, Frann Setzer, Anna Janda, Anna Addleman.

The San Diego “Divorce Options team (L to R): Shawn Weber, Meredith Lewis, Frann Setzer, Anna Janda, Anna Addleman.

Led by Collaborative Family Law Group of San Diego volunteers including attorney and Certified Family Law Specialist Shawn Weber, coach and Licensed Clinical Social Worker Anne Janda, and forensic accountant Anna M. Addleman, CPA, CDFA, CFF, CFE, the Divorce Options provided unbiased information about self-representation, mediation, collaborative divorce, and litigated divorce. The workshop addressed the legal, financial, family and personal issues of divorce in an informational and compassionate small group setting.

Also participating as panelists were attorney and Certified Family Law Specialist Frann Setzer, and attorney and Certified Divorce Financial Analyst Meredith Lewis.

The workshop reviewed the full range of choices couples have as they contemplate divorce, focusing on the non-adversarial, out-of-court options for attendees.

“We are so pleased members of the public were able to take advantage of this opportunity,” said Shawn Weber. “The truth is that the presenters learn just as much from the participants as they do from us. It’s helpful to hear what concerns them most, and what resources they are looking for whether from our organization or others in the community.”

Weber said the Divorce Options program is useful to anyone thinking about divorce or other relationship transitions including cohabiting couples with children or LGBT couples looking for a process aware and respectful of their unique needs. The next Divorce Options workshop is planned in January 2015.

Community groups and organizations can also inquire about bringing a free “Divorce Options” workshop to your location. Contact the Collaborative Family Law Group of San Diego for more information at (858) 472-4022 or email at sandiegodivorceoptions@gmail.com

About the Collaborative Family Law Group of San Diego

CFLG San Diego’s members work together to learn, practice, and promote collaborative processes for problem solving and the peaceful resolution of family law issues, with an eye toward preserving the emotional, as well as the financial, assets of the family. Its goal is to transform the resolution of family law issues through respectful, collaborative processes that protect the integrity and health of family relationships and eliminate the need for families to resort to litigation.

CFLG is online at www.collaborativefamilylawsandiego.com, and LinkedIn.

Choose Your Filing Options Wisely in a Military Divorce

Military families and divorce

Military families and divorce

One-quarter of all active duty United States Navy and United States Marine Corps personnel are based in San Diego County. Add the large number of veterans, retirees, reservists and National Guard, and the significant influence of the military is apparent.

When you are a civilian facing divorce, you file in the state where you live. If you are a member of the military, it isn’t always that simple. In the military community it is common for a couple to be from one state, married in a second state, living in a third state and own property in a fourth state.

Further complicating matters, the couple may have recently been moved by the military to the state where they live and they may not have been there long enough to establish residency.

How does a military couple decide where to file their divorce and does it matter which state they choose? Family law attorney Mark Sullivan of Raleigh, North Carolina provides some helpful guidelines in this article for Military.com.  Sullivan is the author of a guide for lawyers called “The Military Divorce Handbook.”

Whatever your decision, Collaborative divorce remains an excellent option for military families to avoid the negative effects of divorce on the family, particularly where children are involved.

 

 

 

Choose Your Divorce Date

Attorney Carol Severance

by Carol Severance, Attorney at Law and Certified Family Law Specialist

You chose your wedding date and you and your spouse can choose your divorce date.

Some people think the day the Judge signs your Judgment is the day your marriage terminates. But that’s not always true.  Spouses have some control over that date.

Attorney Carol SeveranceA Judgment is an enforceable order that finalizes the terms of your divorce. It’s sometimes known as a Divorce Decree. But in your Judgment, spouses can choose the date to end their marriage with some guidelines:

  1.  In California, you have to wait at least six months from the date divorce papers are served on a spouse to terminate the marriage. But you and your spouse can pick a date that is after that six month period.
  2. You have to pick a date that allows the Judge enough time to sign your Judgment before the date you select. Your attorney can help you choose that date to allow enough time.

You don’t have to pick a date. If you decide it doesn’t matter what date the marriage is terminated, the Court will just fill in the date for you after the six month period.

Five reasons why you might want to choose your own date:

  1.  Getting health insurance when you need it. If you need to get health insurance, start your health insurance on the date you terminate the marriage.  So there’s no guessing. You will know exactly the date you need it.
  2. Avoid the wrong date. If your marriage ended on your birthday, or your child’s birthday, it would not be a date you would have chosen. So you can mutually pick a date to avoid this from happening. It may not be a reason in itself, but if you are choosing the date anyway, you can avoid meaningful dates you don’t want ruined.
  3. Tax purposes. Your marital filing status for tax purposes is determined on the last day of the year. If spouses wish to file married filing jointly, they should pick a date at the beginning of the following year to terminate the marriage, so they can file married for the current year.
  4. Social Security benefits. The ten year mark is significant for social security benefits. So if you’ve been married for nine years, you might choose a date after you have been married for ten years, just to be eligible for derivative social security benefits. This may not be beneficial to all spouses, but if it is, you should secure those benefits.
  5. Immigration process. People working through the legal immigration process may wish to delay the termination of the marriage until the process is complete.

You may even decide to decide later. This means you can submit a Judgment for a Judge to sign, but leave the date open to terminate the marriage. For example, your spouse is being treated by a doctor and does not wish to switch doctors. So the spouses choose to stay married until treatment is over. If you don’t know when the treatment is ending, you can agree to decide on that date later.

Be aware there may be downsides to delaying a termination of marriage, such as liability for your spouse’s debts and accidents, or lawsuits that may expose both spouses to liability. You also are unable to remarry until your marriage is terminated.  On the other hand, if one or both spouses may benefit , you can mutually choose your own date.

By working with your spouse in a collaborative process, you can work together with your attorneys to open up more options that may be beneficial to you. This is just one more way that collaborative divorce may work best for you and your spouse.

 

 

 

Hildy Fentin named President of Southern California Chapter of the American Academy of Matrimonial Lawyers

Contact: Gayle Lynn Falkenthal, APR, Falcon Valley Group
619-997-2495 / gayle@falconvalleygroup.com

(SAN DIEGO) – Family law attorney and Alternative Dispute Resolution (ADR) mediator and collaborator Hildy Fentin has been named President of the Southern California chapter of the American Academy of Matrimonial Lawyers for the 2014-2015 term. Fentin is the first attorney named to this leadership role whose practice is limited to Alternative Dispute Resolution. Fentin is Immediate Past President of CFLGSD and a valued member of the Collaborative Family Law Group of San Diego.

Hildy Fentin, Collaborative Family Law Group of San DiegoThe AAML, founded in 1962, is recognized as the most prestigious national family law organization in the U.S. with more than 1,600 Fellows in the United States. Academy Fellows are highly skilled negotiators and litigators who represent individuals in all facets of family law. To be represented by an AAML Fellow is to be represented by a leading practitioner in the field of family law.

Fentin has extensive experience in various alternative dispute resolution methods, including mediation, Collaborative Divorce, and settlement conference judging. She is often brought into cases to facilitate settlement because of her history of success in finding creative solutions.

“This honor is meaningful to me because it represents a significant shift in thinking about how best to resolve family law disputes,” said Fentin. “It was not so long ago that the only accepted approach to divorce was the traditional litigation model. Now divorcing couples have the option to engage in a consensus-oriented, collaborative approach which is a more dignified and respectful process for everyone involved. It reduces emotional stress and keeps decision making in the hands of the parties, rather than handing their future over to the courts.”

The mission of the Collaborative Family Law Group of San Diego is to transform the resolution of family law issues through respectful, collaborative processes that protect the integrity and health of family relationships and eliminate the need for families to resort to litigation. That is why Fentin has devoted significant time and effort to the growth and development of CFLGSD.

“My goal in any legal matter is to educate and help guide parties to a fair resolution and avoid stressful, lengthy and expensive litigation,” said Fentin. “My reward is when they reach a comprehensive settlement in a peaceful and respectful manner.”

Fentin is a Certified Family Law Specialist by the State Bar of California; Fellow of the American Academy of Matrimonial Lawyers; and immediate Past President of the Collaborative Family Law Group of San Diego. Fentin is a recipient of the Judge Norbert Ehrenfreud Family Law Award (“Norby Award”) for dedicated and meritorious service to the Family Law Bench and Bar, awarded by Family Law Judicial Officers. She has extensive training and experience in negotiation, collaboration and mediation.

“My appointment to this AAML leadership role recognizes the significant impact of Alternative Dispute Resolution and its growing acceptance in the legal community.”

About the Collaborative Family Law Group of San Diego

CFLG San Diego’s members work together to learn, practice, and promote collaborative processes for problem solving and the peaceful resolution of family law issues, with an eye toward preserving the emotional, as well as the financial, assets of the family. Its goal is to transform the resolution of family law issues through respectful, collaborative processes that protect the integrity and health of family relationships and eliminate the need for families to resort to litigation.

CFLG is online at www.collaborativefamilylawsandiego.com, and LinkedIn.

 

Ask These Five Questions to Find Out If You Are a Candidate for Collaborative Divorce

by Adryenn Cantor, CFLS, AAML 
Law Office of Adryenn Cantor, San Diego, California

If you see the completion of your marriage as transition, instead of failure, then you can consciously decide how to move forward in dissolving your marriage with grace and thoughtfulness.

Instead of seeing the process as dividing assets, dividing time with the children, and each of you having your “own” attorney, using conscious transition means you can work together with the support of a Collaborative Team.

You may have no choice that your marriage is ending, but you have many chooses on how that ending is accomplished.

The team approach used in the Collaborative process allows:

  1. Each party to be supported by their own attorney, who works individually with their client and cooperatively with the team to assist the couple in getting to a win-win result.
  2. Each party, should they so desire, can have guidance from a well-trained mental health professional to help them with the emotions of transitioning.
  3. Children can have a mental health professional to be their voice during the process.
  4. The parties can have the wisdom and expertise of one neutral expert to assist with the financial issues; thereby getting the information they need at half the cost.

So, if this New Year you find your marriage ending, perhaps the Collaborative approach is the way to make this important transition happen with the help of a conscious and caring team.

Some thoughts about whether you are a good candidate to use the Collaborative Team approach. Ask yourself these questions:

  1. Do you want to end your marriage with respect and integrity?
  2. Is taking a rational and fair approach to dividing your assets more important than seeing yourself as a winner and your spouse as the loser in this process?
  3. Are your children the most important aspect in this process?
  4. Is saving money, which could go to you or your children more important than spending it on protracted litigation?
  5. Do you want to model for yourself, your spouse and your children how mature adults handle significant challenges?

If your answer is “yes” to two or more of these questions, you should definitely consider having a consultation with a collaboratively trained professional to see if the Collaborative Team process is for you.