Bank Executives with Stock Options Face Difficult Divorces

September 1st, 2011 by

Some bank executives receive part of their compensation through stock options.  They represent a great way to be compensated because the executive can receive pay at a lower tax rate.  If the stock goes up in value the benefits are even greater.  However, stock options create big problems in divorce proceedings.

Stock options can be both property, and income for support in divorce proceedings.  They are property, the value of which must be shared as of the date of separation.  Determining the right value for the stock options is difficult, as it depends on when the executive earned the options (not when the company issued them), when the executive can exercise the options, when the executive will exercise the options, the volatility of the stock price, the risk that the executive never exercises the options and the taxes associated with them.  Stock options existing on the date of separation will be equalized as property, even though the executive may not be able to exercise them until later.  The executive may not be able to make an equalization payment until the he exercises the options.

Bank executives may have to share his stock options twice! To the extent that stock options are pay, they are income when calculating support.  The stock options at the time of separation may not show up on the executive’s tax return for several years until they are exercised.  At that time, the other spouse may want to use them as income for calculating support, even though she has already received half the value. Using the same stock options for both property and support calculations can result in the other spouse receiving payments worth more than the value of the options.  That is not fair. Careful attention is needed to prevent it.

A marriage contract can set out fair terms for the stock options on separation.  Without that, both separated spouses need skilled family law lawyers to assist with the complicated issues associated with stock options.

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