Stock Options and Divorce

Today, stock options can be significant assets in a marital estate that need to be divided during a divorce. Many employees from mid-level to executive participate in corporate stock option plans. A stock option allows the holder of the option to purchase a predetermined number of shares, prior to a specified expiration date, at a set price (called the Strike Price). Stock options are granted to an employee to induce that person to join or stay with a company or as compensation. The right to purchase the stock is usually for a set period of time and the options vest over time. The options are usually unvested when received. Deciding to purchase the stock is called exercising the option. A stock option is treated as marital property even though it may not be vested. The most instructive case in Minnesota with respect to dealing with stock options in divorce is Salstrom v. Salstrom, 404 N.W.2d 848 (Minn. Ct. App. 1987). If the option has not yet vested at the time of the divorce, there will be both a marital and a nonmarital component to the option. Id. The basic rule that came out of Salstrom with respect to unvested stock options is that the marital interest in each payment will be a fraction of that payment, the numerator of the fraction being the number of years (or months) of marriage during which benefits were being accumulated, the denominator being the total number of years (or months) during which benefits were accumulated prior to being paid. Salstrom at 851. For example, if the husband was awarded 500 stock options on January 1, 2005 and they do not vest until January 1, 2010 but the parties divorce on January 1, 2009, the stock options are 80% marital property and 20% nonmarital property. There are various tax consequences when applying the Salstrom formula and exercising certain kinds of stock options and it is best to consult a tax professional and an attorney when dealing with stock options and divorce.