How do stock options impact alimony, separate maintainance and child support?

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Stock Options Income Support Spousal Support

Stock options do impact alimony, separate maintenance and child support, but as courts only recently began dealing with support cases involving stock options, and the law is still taking shape.

Employer granted stock options had been relatively rare as they were issued only to a relatively small number of senior executives in large, publicly held companies. Now, however, an estimated 10 million Americans have stock options granted by their employers. In fact, employee stock options are an important part of many employees’ total compensation package, and in some industries, the most important element.

Employer-granted qualified stock options are typically issued at the price of the company’s shares in the market on the date of grant. If the market price of the company’s shares later increases, then the options are “in the money” and have real value. Once the option “vests”, the option holder can purchase the shares and (in theory) sell them and realize a gain. The total value of all unexercised stock options was recently estimated at $1Trillion.

However, most stock options can not be exercised immediately on issue. They typically “vest” over a period of 3 to 5 years, or longer, and continued employment with the same company is nearly always a condition for vesting. In privately held companies there is always the question of who people can sell their shares to, as they are illiquid. In many publicly held companies, especially those that had a recent IPO, there also are restrictions on when persons with vested options can sell the shares they get on exercise of their options. Some employees have seen their options become worth many millions of dollars in trading after an IPO, only to watch the value of the shares fall significantly, going well below the IPO price, and even below the option exercise price (and thus “out of the money”) when the market ceases to value their company as highly. The truth is the market price of publicly held companies, or share value of privately held companies, and thus the value of stock options, can change dramatically.

The first issue a court faces is whether the stock options are purely property, or represent something more, such as a combination of property and income.

State laws and courts traditionally divide the property the couple has earned during the marriage in a divorce. It is 50-50 if the couple lives in a community property state or based on “equitable distribution” or comparable approaches in other states. If, for example, the husband was granted the stock options for 1,000 shares of his employer’s stock, and when the couple divorced the stock options were divided 500 to each, the husband would argue that he has given his wife half the property and she is not entitled to anything more based on his options.

The wife would argue that while that is the appropriate division of the property, the husband also has a duty to support his wife, and their children, separate from the division of property. She would also argue that the stock options also represent income, and as such their value, in his hands, even if not exercised, should be taken into account as he could realize the value simply by selling them. She would point out that many employers issue stock options as a form of compensation, and she and the children should benefit from that form of income as well. In addition, she would argue, not only the value of the old options he holds, but also the value from likely future grants of options should be taken into account in setting his support obligations, as the income of the person responsible for support is one of the key factors used in determining the amount of spousal and child support.

In the few courts that have decided cases involving options, most have decreed that where the appreciation in value of a spouse’s stock options represent a significant share of the spouse’s total income, to ignore that income would be unfair to the spouse and children entitled to support. In essence, they said that failing to take the increase in value of stock options into account would allow people to camouflage their income. One court has ruled that in it was proper when setting support obligations to average the father’s increase in income from exercising stock options and add it to his base salary. Another court has noted that if the value of the options feel, the change would be a potential ground to seek a reduction in support payments.