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.

Broken Trust: Advice About Estate Planning During A Divorce

by Meredith L. Brown, Esq.
Brown & Brown

Many couples prepare Wills and Trusts in connection with a happy life event, such as the birth of a child. Frequently these documents are placed in a safe deposit box, never to be updated or even thought about again.

When the unfortunate life event of divorce happens, couples often opt to defer consideration of their old estate planning. No one wants to think about their mortality on a good day, much less when divorce is on their mind. This decision is understandable, but it is probably unwise and potentially costly.

First, a note of caution: if a Petition to dissolve the marriage has already been filed, the law requires that specific steps be taken before changes are made to Wills and Trusts. Similarly, there is an automatic restraint against making changes to beneficiary designations on any insurance. Couples must be sure to comply with these rules.

Family law does not place restrictions on changes to your Advance Health Care Directive after you have filed for divorce. Most couples designate their spouse as their legal voice when it comes to treatment and end of life decisions. Even in divorce situations where couples are amicable, it may not be appropriate for a soon-to-be ex spouse to make these decisions in the midst of a divorce.

How do you decide whether to change your existing estate plan?

The first (and obvious) step is to read and understand your documents. Most couples prepare documents that leave the estate to the survivor between them. Then, ultimately, the estate goes to their children. But this is not always the case, particularly in second marriages.

If you acquired assets after your Trust was created (for example a new home), determine whether title was taken in the name of your Trust. If you hold assets outside of your Trust, you could have the cost of a probate proceeding.

Even if you haven’t done any estate planning but own real estate or other titled assets with your spouse, be sure to check the deed or other title documents. Certain forms of title such as joint tenancy carry with them an automatic right of survivorship. You should consider whether you wish to change the form of title to one without survivorship rights. But before you make any changes, be sure to comply with the notice requirements mandated by law.

Second, ask yourself:  if you were hit by the proverbial truck before your divorce is final, would you want your spouse to receive your share of the estate? If you have children, do you trust that your former spouse will preserve your share of the estate so that your children ultimately receive everything? Would you feel differently if your former spouse sold the marital residence? What if he or she remarried?

Keep in mind that even if you decide to change your estate planning by preparing new Wills and Trusts, your former spouse may still have control over assets you leave to your children, if they are still under age 18. If you do not wish for this to happen, you will need to designate someone else as the guardian of the estate of your children.

As you may guess, determining how your assets are distributed upon your death can be complicated like many other aspects of your life when you file for divorce.  But this is something you need to address for the well-being of yourself and your children. You don’t have to go it alone.  Investing in the advice of an attorney with expertise in estate planning as well as a skilled financial specialist is an investment well worth making.

If you pursue a Collaborative Divorce, a financial specialist is part of your divorce team.  This can be extremely helpful if you are also working through a complex estate plan. It’s another smart reason to consider the Collaborative Process for your divorce.

Claiming ‘Head of Household’ Status, Dependent Children During Divorce

by Alex Kwoka, Attorney at Law, Law Office of Alexandra M. Kwoka

If you are considering separating or divorcing,  and/or moving from the marital home with a child or children, thinking about how you will file your tax return is important.

First:  When will you separate into two households?

If you move out after June 30 in the tax filing year, you will not be able to claim either “Head of Household” or “Single” tax status, which means your tax rate may be greater than when you were married if you filed jointly.

IRS regulations permit parents who are not yet divorced or separated under a Judgment to file as Head of Household (if they meIRS 1040 Tax Formet certain requirements).

HH status is  a benefit to a parent, because filing as HH generally results in taxation at rates lower than “Married filing separately” or Single.

To file as Head of Household, at least one child must live with the taxpayer. The taxpayer must “maintain the household” by paying for housing, utilities and food.  The household must also be “the principal place of abode” of the child, which means the child must live with the parent for more than half the year according to IRS Regulations.

Because of this, be cautious in describing your custody arrangement if you are thinking of sharing custody of a child or children. If you are planning on being the Head of Household, as a parent  you may need to prove that you maintained a household for a child AND had approximately 51 percent of custody time. If you and your spouse share time equally or 50/50 you may not be able to qualify for HH status.

Even if there is no Court order determining custody, if you and your spouse are NOT living together for the last six months of the year, and you maintain a household for a child or children, you may qualify for HH status AND a child care credit if you file a separate return and meet the other requirements.

California law permits a taxpayer to claim a “joint custody Head of Household credit” if parties have lived separately for an entire year, AND a child lives with a parent no less than 146 days and no more than 219 under a written agreement or a Judgment or order. The law may be different in another state.

Second:  Who will claim your child or children as dependents?

IRS Regulations permit parents who have elected to separate or divorce (and taken steps to separate/divorce by moving to separate households) to not only claim one of several tax status when tax returns are filed, but also to decide who will claim a child or children as a dependent.

Claiming a child as a dependent means you claim a “dependency deduction,” also called a  “dependency exemption.”

The deduction/exemption means that the amount of the dependency exemption is deducted from your income. It reduces gross income in the calculation to arrive at taxable income.

In tax year 2013, the eligible dependency exemption is $3,900 unless a taxpayer is subject to Alternative Minimum Tax; or the deduction is reduced because his/her adjusted gross income exceeds $300,000 on a joint return, $275,000 on a HH return, $250,000 on a single return, or $150,000 on a married filing single return.

This means if you are a taxpayer in the 28% bracket in 2013, a $3,900 exemption is worth $1,092.

To claim a child as a dependent:

  • The child must be under 19 as of 12/31 of the tax year OR be a full-time student under the age of 24.
  • The child must be a dependent – i.e., live with the parent for more than one-half of the tax year.
  • The parent must provide support for the child.

If a child lives with both parents, or one parent is the parent with physical custody  under a decree, order or Judgment but both parents claim the child as a “dependent,” the IRS determines who is the “custodial parent” by looking for proof.  The IRS will determine which parent was the one with whom the child resides for the greater number of nights during the calendar year.

A parent with custody can “release” a dependency exemption for one or more children to the other parent by signing and filing  IRS Form 8332. It permits a custodial parent to release the exemption for one year, for several and/or future years, and to revoke the release. The non-custodial parent can then claim the child as a dependent by attaching the signed form to his or her tax return.  IRS Form 8332 explains the rules for children of divorced or separated parents, and is available online.

The Child Care Credit

If a parent can claim a child as his/her dependent and if the parent has child care costs for this child (who must be under age 13) IRS Regulations also permit the parent to claim a child care credit if he/she is the custodial parent.

But a non-custodial parent  to whom a dependency exemption has been released can NOT claim on her/his federal tax return a child care credit.  The custodial parent alone may claim the child care credit.

The amount of the child care credit depends on the claiming taxpayer’s income.  And, expenses which can be claimed are capped: $3,000 for one child; $6,000 for two or more children.

Because these rules and conforming with them to the satisfaction of the IRS can be complex and involve a significant amount of tax savings, it is wise to consult your tax professional if you have any questions or concerns.

Division of Marital Assets in Divorce: Fairness and Respect

A recent Forbes Magazine article offers advice specifically to women about assets in a financial portfolio that they might overlook when working on the division of those assets in a divorce.

From a practical standpoint, it’s true that people don’t always clearly identify or think about all of their “assets” at the time of divorce. But those of us involved in the Collaborative Divorce approach believe the focus of a divorce should not be oDivorce and Fighting, Boxing Glovesn “stuff.”  Advocates of Collaborative Divorce focus on the process of making good decisions without alienating one partner from the other and coming out at the end with respect and with the relationships among members of a family preserved moving forward. Simply because two parents will no longer be married doesn’t mean family ties vanish.

It is also troublesome that there are still individuals addressing women in this way, reinforcing an unfortunate stereotype that we firmly reject. Collaborative Divorce is about fairness, cooperation, and equal treatment whether for men or women, whether in traditional or same-sex marriages.

If you’re considering divorce, consider the healthier alternative provided by a Collaborative Divorce. Contact one of our members to learn more about the Collaborative Divorce process and how it can benefit you and your family. A divorce doesn’t have to be a fight, and it doesn’t have to hurt.



The Defense of Marriage Act, Prop 8 and Divorce: What Now?

Following the U.S. Supreme Court’s ruling striking down the Defense of Marriage Act (DOMA) today as unconstitutional, and declining to rule on Prop 8, therefore allowing legal same sex marriage in California, there are numerous ramifications. Some of them have to do not with marriage, but with divorce.

For example, what are the financial ramifications for same sex couples during a divorce? CLFG San Diego member Justin Reckers of Pacific Divorce Management looks at a few of the issues including taxes, benefits, and spousal support in this article.



State of Washington Encourages Collaborative Divorce

The State of Washington passed new legislation which encourages couples to consider collaborative divorce, keeping families out of courtrooms. The bill signed by Jay Inslee is called the Uniform Collaborative Law Act.  It allows couples to agree on terms of their divorce without going to court.

The members of CFLG San Diego congratulate Governor Inslee and the legislature for making this option available to divorcing couples in Washington. We wholeheartedly support this alternative to adversarial divorce processes that take up time and resources of the state’s courts and hurt families in the long run.

Read more here:

Taxes and Divorce: Six Tips For Women

Filing Taxes After DivorceCLFG San Diego member Justin Reckers, Director of Financial Planning at Pacific Wealth Management and Managing Director at Pacific Divorce Management, shares this recent article from Forbes Magazine with tips to help women (and men, too) who were divorced in 2012 or going through a divorce now that will help you avoid paying higher taxes than necessary or any potential penalties.

Read the article here.

The IRS offers a publication via its website for divorced or separated individuals, Publication 504. It covers filing status, exemptions, alimony, and property settlements among its topics. You may find it helpful: get it here

Don’t Let a Gray Divorce Put You In The Red Financially













The issues surrounding a “Grey Divorce” – divorcing in your 50s, 60s, or later years  – present many of the same issues that occur when divorcing at earlier ages.

However, the fact the divorce is happening later in life can present unique financial challenges.  There is less time to financially recover from a divorce that happens late in one’s working career or in retirement.

It’s imperative that both spouses work together to openly evaluate and understand the potential financial impact of a gray divorce. This is where considering collaborative divorce can present distinct advantages.

A collaborative divorce, one in which the parties agree to work together with experts to problem solve outside the courts, can preserve financial and emotional resources while achieving a resolution that respects everyone’s needs.

One of those experts is a financial professional, who can help you evaluate common issues in the divorce process involving money.

Some of those common issues you may be facing in a gray divorce:

  • What happens to the marital home?  Often one spouse is attached to the idea of remaining in the house.  However, this may be an unrealistic dream given the financial realities of the divorce.
  • What will future income flows look like from such sources as pension plans, Social Security, and investment income?
  • Prior to retirement, is this income level adequate for both spouses?  Will these income flows be adequate at the desired retirement age, or should one consider working longer before retirement?
  • How are assets like pensions, investments, real property, business interests, life insurance, etc. to be appraised and divided?
  • Are there specific health issues that need to be understood and addressed?  What assumptions are to be made regarding medical coverage, benefits, and costs?  Have provisions for long term care been adequately addressed?
  • Are there special needs for the children and/or grandchildren that need to be addressed?
  • What impact will the divorce have on existing estate plans, wills, trusts, Powers of Attorney, medical directives, beneficiary designations, gifting strategies, legal title to assets, and any other applicable items?
  • Has credit eligibility and creditworthiness for both souses been addressed?

Divorcing in one’s golden years can happen at a time when retirement is approaching and incomes may start to shrink.  There is less time to recover from the financial impact of a divorce at an older age. Carefully and realistically assess the financial, emotional, and legal impact of the divorce in light of the unique challenges it may pose.



Fox 5 News Interview, January 7, 2013: Make 2013 A Better Year for Your Wallet featuring CFLGSD Member Justin Reckers

Justin Reckers, CFP®, CDFATM, AIF®, Managing Director of Pacific Divorce Management and immediate past board chairman of CFLG San Diego, was recently interviewed by reporter Christian de la Rosa of Fox 5 News in San Diego on tips to improve your financial health in 2013. See the report here for Justin’s excellent advice, whether you’re getting divorced or not.