stock options and deferred compensation in divorce
TRANSCRIPT
Stock Options and Deferred Compensation in Divorce
Presented by Mark Vogel, CPA/ABV/CFF, CVA
Introductions
Mark Vogel, CPA/ABV/CFF, CVA
Partner at Gross Mendelsohn
32 years of experience providing business valuations, litigation support and forensic accounting services to attorneys
What is a stock option?
A contract between an employee and employer
An agreement that gives the employee the right to:
A certain amount of shares in the employing company
Purchase shares at a fixed price and designated amount of time
Stock Options Are…
Either vested or nonvested
Vested stock is stock that’s considered exercisable
Stock Options Are…
Either vested or nonvested
Vested stock is stock that’s considered exercisable
Nonvested stock is stock that is not yet eligible to be exercised
Stock Options Are…
NSOs“Nonqualified
Stock Options”
Stock Options Are…
ISOs“Incentive
Stock Options”
The key difference is their tax treatment
Are employee stocks considered marital or separate property?
There Are Two Factors To Consider…
Are the stocks vested or nonvested?1
There Are Two Factors To Consider…
Are the stocks vested or nonvested?1
2 Were the stocks payment for past work or incentive for future work?
There have been cases where stock options that were procured after the separation date have been allocated depending on when the stock option was actually earned
Were the stocks payment for past work or incentive for future work? 2
There have been cases where stock options that were procured after the separation date have been allocated depending on when the stock option was actually earned
This occurred in the 1995 New Jersey Supreme Court case Pascale v. Pascale
Were the stocks payment for past work or incentive for future work? 2
The New Jersey Supreme Court agreed with the trial court which held that “‘the case law supports a flexible approach in determining which assets are includable and which assets are not includable for equitable distribution,’ [and] that it would be unfair to permit Debra ‘to retain fruits derived during marriage simply because of a technical determination regarding her choice of a filing date’.” (Pascale v. Pascale, 1995)
Debra Pascale v. James Pascale
Pascale v. Pascale, 660 A.2d 485, 497 (N.J. 1995)
New Jersey Supreme Court, 1995
If an employee is granted earned stocks, which are stocks given as compensation for past or current services
AND
If the stock was earned before the date of separation
When Are Stock Options Considered Marital Property?
OR
If an employee is granted vested stocks as an incentive for the services they will provide a company in the future
AND
If the stock options vested before or during the time of marriage
When Are Stock Options Considered Marital Property?
When Are Stock Options Considered Marital Property?
When Are Stock Options Considered Marital Property?
“We conclude that to the extent an employee stock option is granted in consideration of past services, the option may constitute marital property when granted. On the other hand, an employee stock option granted in consideration of future services does not constitute marital property until the employee has performed those future services.” (In Re Marriage of Miller, 1996)
In Re Marriage of Miller
In Re Marriage of Miller, 915 P.2d 1314 (Colo. 1996)
Colorado Supreme Court, 1996
In Re Marriage of Miller
How to allocate earned stock options between marital and separate property
No matter when the stock options vest, the stock options are considered marital property if
A spouse begins employment during the marriage
The stock options are given as compensation for past services
How to allocate stock options considered incentive for future services
This can be done by applying the Nelson time rule formula to divide nonvested stock options into marital and separate property
In Re Marriage of Miller
What are the popular time rule formulas?
The Two Most Popular Time Rule Formulas
Hug Time Rule Formula
Examines the employment date to
the vesting date
Nelson Time Rule FormulaExamines the grant date to the vesting
date
The Nelson Time Rule Formula
Grant Date
Choose later date:
Date of Marriageor
The Nelson Time Rule Formula
Grant Date
Choose later date:
Date of Marriageor
Separation Date
Choose later date:
Date of Marital Dissolutionor—
The Nelson Time Rule Formula
Grant Date
Choose later date:
Date of Marriageor
Separation Date
Choose later date:
Date of Marital Dissolutionor
Grant Date Date of Vesting
—
—
The Hug Time Rule Formula
Employment Date
Choose later date:
Date of Marriageor
The Hug Time Rule Formula
Employment Date
Choose later date:
Date of Marriageor
Separation Date
Choose later date:
Date of Marital Dissolutionor—
The Hug Time Rule Formula
Employment Date
Choose later date:
Date of Marriageor
Separation Date
Choose later date:
Date of Marital Dissolutionor
Employment Date Date of Vesting
—
—
“We are persuaded that a Miller-type analysis best accommodates the twin tensions between portions of stock plans acquired during the marriage versus those acquired outside of the marriage, and stock plans which are designed to compensate for past services versus those designed to compensate for future services.” (DeJesus v. DeJesus, 1997)
DeJesus v. DeJesus
DeJesus v. DeJesus, 90 N.Y.2d643 (NY. Ct. App. 1997)
Court of Appeals of New York, 1997
DeJesus v. DeJesusHow to determine if stock options are
granted for past or future services
Is the stock option considered an employee bonus?
Does the stock option replace a set salary?
Will the employee’s performance alter the value of the stock?
Are the stocks offered as a sign-on incentive for new employees?
How do you distribute stock options?
There Are Two Common Methods…
Present Valuation
Deferred Distribution
Deferred Distribution
An employee’s marital partner can purchase a share of the employee’s stock option if, as and when the stock options are exercised
Deferred Distribution
An employee’s marital partner can purchase a share of the employee’s stock option if, as and when the stock options are exercised
Deferred Distribution
An employee’s marital partner can purchase a share of the employee’s stock option if, as and when the stock options are exercised
Deferred Distribution
Employee’s marital partner can purchase their marital share of stock if, as and when the stock options are exercised
Commonly referred to as the if, as and when method Excludes employee stock options as separable marital
assets Usually, the courts mandate that the employee
exercises the stock options, but on occasion they will rule that the spouse will exercise them instead.
Present Valuation
Evaluates how much the marital portion of the stock options are worth and awards the employee’s spouse something else of equal value
Present Valuation
Evaluates how much the marital portion of the stock options are worth and awards the employee’s spouse something else of equal value
Present Valuation
Evaluates how much the marital portion of the stock options are worth and awards the employee’s spouse something else of equal value
This can be a problem because it can cause unequitable distribution from decayed stock values unexercisable stocks
Mark Vogel, CPA/ABV/CFF, CMA, CVA
Partner, Litigation Support
703.537.0576
Next Steps
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