Dividing Stock Options in Divorce
The purpose of child support is to maintain the standard of living
to which the child is accustomed or to which the child would
become accustom if the marriage had remained intact. It is true,
however, that some states have limited the extent of child support
where a formula outcome yields extraordinarily high child support
results. Nevertheless, it is clear the prevailing view is that
the child should not suffer financially because of the dissolution
of the parent’s marriage. This implies that, in decisions
concerning executive stock options, the child’s welfare
takes precedence over the welfare of the titled parent.
States have not been consistent on when an employee stock option
becomes income for child support. The general choices are: (1)
at the time of grant; (2) at the time of vesting; and (3) at the
time of exercise. A realized cash flow can only occur at the time
one exercises the option, converting the option into underlying
securities or cash. The following example illustrates these issues.
Example
1: When Employee Stock Options Become Income for Child Support
Titled spouse is granted 10,000 employee stock options of
BFS Corporation on December 31, 1999. The options have a 10-year
life with an exercise price of $50 per share. The options all
vest on January 1, 2001.
Grant Date Values
At December 31, 1999 (grant date), BFS’s share price
was also $50 per share. At this date the options have an intrinsic
value of zero as the share price equals the exercise price. However,
BFS 1999 audited financial statement states that the fair value
of these options on December 31, 1999, was $7. The fair value
represents what the employee option could be sold for if it was
marketable instrument. The fair value represents the value to
the holder of the option.
Vesting Date Value
On January 1, 2001, the options vest. BFS’s share price
on January 1, 2001, is $49 per share. At this date the options
have an intrinsic value of zero as the share price is less than
the exercise price. It is also agreed that the fair value of
the stock options is $6.50 per option. Again, this value cannot
be realized on January 1, 2001, but each option still has value
because there is a good chance that the BFS stock will rise over
$50 per share during the remaining nine-year life of the option.
Of course, if BFS’s share price were greater than $50 per
share, the employee stock option would be in-the-money and
have a positive intrinsic value, and its fair value would also
be greater.
Value during Vesting Year
By year-end 2001 BFS’s share price has risen to $60
per share. At year-end the intrinsic value has risen to $10 per
option, and fair value of the employee stock options was estimated
to be $15 per option.
Value at Exercise
The titled spouse exercises the option June 30, 2003, when
the stock is at a value of $65 per share. Upon exercise the titled
spouse sells BFS stock received through the option. The titled
spouse receives $15 per option before consideration of taxes.
These pricing realities make the determination of income for child
support a difficult process.
More information about the book A
Family Lawyer’s Guide to Stock Options |
