DIVIDING EMPLOYEE STOCK DIVIDING EMPLOYEE STOCK OPTIONS IN DIVORCEOPTIONS IN DIVORCE

Thea Glazer, CFP, CDFA, Thea Glazer, CFP, CDFA, MS AccountingMS Accounting

858858--485485--08140814thea@glazerfa.comthea@glazerfa.com

www.glazerfinancialadvisors.comwww.glazerfinancialadvisors.com

EMPLOYEE STOCK OPTION EMPLOYEE STOCK OPTION DEFINITIONDEFINITION

AnAn EmployeeEmployee StockStock OptionOption (ESO)(ESO) isisthethe rightright givengiven byby anan employeremployer toto ananemployeeemployee toto purchasepurchase aa specifiedspecifiedemployeeemployee toto purchasepurchase aa specifiedspecifiednumbernumber ofof sharesshares ofof thethe employer’semployer’sstockstock forfor aa specifiedspecified priceprice forfor aaspecifiedspecified timetime..

IMPORTANT TERMSIMPORTANT TERMS

•• OptioneeOptionee –– thethe employeeemployee toto whomwhomoptionsoptions areare grantedgranted

•• ExerciseExercise –– toto purchasepurchase stockstock usingusinganan optionoptionanan optionoption

•• GrantGrant DateDate -- thethe datedate thethe optionoptionbecomesbecomes thethe employee’semployee’s propertyproperty

•• GrantGrant oror ExerciseExercise PricePrice -- thethe priceprice atatwhichwhich thethe employeeemployee maymay purchasepurchasethethe stockstock

IMPORTANT TERMS CON’T.IMPORTANT TERMS CON’T.

•• ExerciseExercise oror VestingVesting DateDate -- thethe firstfirstdatedate thethe employeeemployee maymay useuse thetheoptionoption toto buybuy stockstock.. ItIt isis commoncommonforfor aa singlesingle grantgrant toto havehave aa vestingvestingforfor aa singlesingle grantgrant toto havehave aa vestingvestingscheduleschedule whichwhich setssets outout thethe %% oror ##ofof thethe optionsoptions thatthat becomebecome vestedvested atateacheach vestingvesting datedate

•• UnvestedUnvested OptionsOptions –– optionsoptions thatthathavehave notnot yetyet reachedreached theirtheir vestingvestingdatedate

IMPORTANT TERMS CON’T.IMPORTANT TERMS CON’T.

•• ExpirationExpiration DateDate -- thethe lastlast datedate ananoptionoption cancan bebe exercisedexercised;; ifif itit isis notnotexercisedexercised byby then,then, itit isis lostlost andand anyanyvaluevalue isis forfeitedforfeitedvaluevalue isis forfeitedforfeited

•• InIn thethe MoneyMoney OptionsOptions –– optionsoptionswhosewhose fairfair marketmarket valuevalue exceedsexceedsthethe grantgrant priceprice

•• UnderwaterUnderwater OptionsOptions –– optionsoptionswhosewhose grantgrant priceprice exceedsexceeds thethe fairfairmarketmarket valuevalue

TYPES OF EMPLOYEE STOCK TYPES OF EMPLOYEE STOCK OPTIONSOPTIONS

•• NonqualifiedNonqualified OptionsOptions (NQs)(NQs)

•• IncentiveIncentive StockStock OptionsOptions (ISOs)(ISOs)•• IncentiveIncentive StockStock OptionsOptions (ISOs)(ISOs)

DifferenceDifference betweenbetween NQsNQs andand ISOsISOs isistaxtax treatmenttreatment andand transferabilitytransferability

NONQUALIFIED STOCK OPTIONSNONQUALIFIED STOCK OPTIONS

•• Exercise Generates Ordinary IncomeExercise Generates Ordinary Income

•• Transferable if Allowed by Plan Transferable if Allowed by Plan --Need DRONeed DRO

•• No Tax Consequences from TransferNo Tax Consequences from Transfer•• No Tax Consequences from TransferNo Tax Consequences from Transfer

•• “Alternate “Alternate OptioneeOptionee” receives 1099” receives 1099

•• If Not Transferable, Employee Must If Not Transferable, Employee Must Exercise on Behalf of SpouseExercise on Behalf of Spouse

INCENTIVE (QUALIFIED) INCENTIVE (QUALIFIED) STOCK OPTIONSSTOCK OPTIONS

•• Are Not Transferable As Qualified Are Not Transferable As Qualified ––Become Nonqualified If TransferredBecome Nonqualified If Transferred

Most plans do not allow transferMost plans do not allow transfer

•• No Tax Upon ExerciseNo Tax Upon Exercise•• No Tax Upon ExerciseNo Tax Upon Exercise

•• LTCG if Held 2 Yrs. from Grant Date or LTCG if Held 2 Yrs. from Grant Date or 1 Yr. from Exercise Date1 Yr. from Exercise Date

•• May Create AMT upon Exercise May Create AMT upon Exercise –– Dual Dual Cost Basis TrackingCost Basis Tracking

THE PLAN DOCUMENTTHE PLAN DOCUMENT

Main Points Covered:Main Points Covered:

•• What Type of OptionWhat Type of Option

•• Vesting Period and ScheduleVesting Period and Schedule

TransferabilityTransferability•• TransferabilityTransferability

•• What happens if employee retiresWhat happens if employee retires

•• What happens if employee leaves What happens if employee leaves before retirementbefore retirement

Account StatementsAccount Statements

Will Include:Will Include:

•• Grant DateGrant Date

•• Type of OptionType of Option

•• Grant PriceGrant Price•• Grant PriceGrant Price

•• # Shares Granted# Shares Granted

•• # Outstanding (not yet exercised)# Outstanding (not yet exercised)

•• # Exercisable (vested)# Exercisable (vested)

•• Expiration DateExpiration Date

VESTING SCHEDULESVESTING SCHEDULES

ShowShow thethe followingfollowing forfor UnvestedUnvestedOptionsOptions::

•• DatesDates ofof futurefuture vestingvesting

•• ## ofof optionsoptions exercisableexercisable atat eacheachdatedate

OPTION EXERCISE METHODSOPTION EXERCISE METHODS

•• Regular Regular -- Pay CashPay Cash

•• Cashless Cashless –– Turn in Portion of OptionsTurn in Portion of Options

•• Stock Swap Stock Swap –– Turn in Previously Turn in Previously Exercised StockExercised Stock

TRANSACTION HISTORYTRANSACTION HISTORY

Shows the following for Exercised Shows the following for Exercised Options:Options:

•• DateDate ofof exerciseexercise•• DateDate ofof exerciseexercise•• ## ofof optionsoptions exercisedexercised atat eacheach datedate•• TradeTrade PricePrice•• MarketMarket PricePrice•• ProceedsProceeds (Gross(Gross oror Net)Net)

STOCK ACCOUNTSTOCK ACCOUNT

ShowsShows::•• # of shares of previously exercised # of shares of previously exercised

options that are still ownedoptions that are still owned

Cost Basis of Stock Cost Basis of Stock •• Cost Basis of Stock Cost Basis of Stock Was stock acquired with a stock Was stock acquired with a stock swap?swap?

OPTION EXERCISES FOR OPTION EXERCISES FOR

CORPORATE INSIDERSCORPORATE INSIDERS

•• May be subject to blackout periods May be subject to blackout periods and volume restrictionsand volume restrictions

•• Creation of 10b5Creation of 10b5--1 exercise/trading 1 exercise/trading plan solves restriction problem plan solves restriction problem

TAXATIONTAXATION

• NonqualifiedNonqualified

-- Taxed as ordinary income at time of Taxed as ordinary income at time of exerciseexercise

-- May incur long or short term capital May incur long or short term capital gains tax when stock is soldgains tax when stock is soldgains tax when stock is soldgains tax when stock is sold

•• Incentive (Qualified)Incentive (Qualified)

-- No tax at time of exerciseNo tax at time of exercise

-- Long term capital gain if stock held 2 yrs. Long term capital gain if stock held 2 yrs. from grant date and 1 yr. from exercisefrom grant date and 1 yr. from exercise

-- Exercise may create Alternative Exercise may create Alternative Minimum Tax liabilityMinimum Tax liability

DETERMINING THE COMMUNITY DETERMINING THE COMMUNITY

PROPERTY SHARESPROPERTY SHARES

HUG Formula HUG Formula

or or

Nelson FormulaNelson FormulaNelson FormulaNelson Formula

Harrison Formula not used very oftenHarrison Formula not used very often

HUG FORMULAHUG FORMULA

Used to attract new employee andUsed to attract new employee and

reward past servicereward past service

FormulaFormula

# Days From Date of Hire to Date of Separation # Days From Date of Hire to Date of Separation

÷÷

# Days From Date of Hire to Date of Exercisability# Days From Date of Hire to Date of Exercisability

NELSON FORMULANELSON FORMULA

Intended as compensation for future Intended as compensation for future service and to keep employeesservice and to keep employees

FormulaFormulaFormulaFormula

# Days From Date of Grant to Date of Separation # Days From Date of Grant to Date of Separation

÷÷

# Days From Grant to Date of Exercisability# Days From Grant to Date of Exercisability

VALUING THE OPTIONSVALUING THE OPTIONS

•• “In the money value” = Difference between “In the money value” = Difference between market price and grant pricemarket price and grant price

•• BlackBlack--ScholesScholes Formula Formula –– Most Commonly Most Commonly Used MethodUsed Method

Considers Time to Expiration, Stock Price, Considers Time to Expiration, Stock Price, Considers Time to Expiration, Stock Price, Considers Time to Expiration, Stock Price, Grant Price, Stock Volatility, Dividends, RiskGrant Price, Stock Volatility, Dividends, Risk--Free Rate of ReturnFree Rate of Return

•• Binomial FormulaBinomial Formula

Similar to BlackSimilar to Black--ScholesScholes but also considers but also considers varying exercise datesvarying exercise dates

DIVIDING AND DISTRIBUTING DIVIDING AND DISTRIBUTING THE OPTIONSTHE OPTIONS

•• Deferred Distribution Deferred Distribution –– Shares Risk Shares Risk and Upsideand Upside

-- Divide the Community Options To Be Divide the Community Options To Be Exercised LaterExercised LaterExercised LaterExercised Later

-- If Plan Allows, Set Up Account for If Plan Allows, Set Up Account for NonNon--Employee SpouseEmployee Spouse

-- If Not, Employee Exercises For ExIf Not, Employee Exercises For Ex

•• Value Options and Trade Off For Other Value Options and Trade Off For Other AssetsAssets

RESTRICTED STOCKRESTRICTED STOCK

Stock given to employee by employerStock given to employee by employer

•• No cost to employeeNo cost to employee

•• Has vesting schedule Has vesting schedule •• Has vesting schedule Has vesting schedule

•• Taxed as ordinary income upon vestingTaxed as ordinary income upon vesting

•• Less risky than options Less risky than options -- cannot be cannot be worthlessworthless

QUESTIONS?QUESTIONS?

Need help or more information?Need help or more information?

Give me a call or send me an eGive me a call or send me an e--mail at mail at

858858--485485--0814 (t), 8580814 (t), 858--205205--2714 (c)2714 (c)

thea@glazerfa.comthea@glazerfa.com