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Trusts and the division of stock options

On Behalf of | May 12, 2021 | Divorce |

People holding important positions at California companies often receive stock options in their executive compensation packages. Employers increasingly offer stock options to retain talent and encourage hard work. Stock options at a successful company can prove quite valuable when an employee completes a vesting period and can exercise the right to sell the stock. The vesting period, however, complicates a divorce. The employer restricts the sale of stock options according to the employment contract and generally does not make an exception for a divorce. A transfer to a trust could become necessary as part of a divorce settlement.

Setting up a trust with a divorce agreement

Because stock options cannot be cashed out until a future date, a trust to hold the asset must be set up at the time of the divorce. The trust would designate the ex-spouse who should receive a share of the other person’s stock options as the beneficiary.

Tax issues

When you negotiate a divorce that includes stock options, a person must consider their potential value and the taxes due upon their sale. Whenever the stocks are sold, the proceeds become taxable. Tax obligations could carve out approximately 40% of the value. Failing to account for taxes could reduce the value of a settlement.

The negotiation of the divorce settlement could potentially result in having the person who earned the stock option agree to pay the income taxes. To avoid confusion and disputes about who owes the taxes, the divorce agreement should specifically address this issue.

Although finalizing the details of a divorce settlement may be time-consuming, a thorough document could result in an equitable divorce. Legal advice may help a person understand asset value and possible tax consequences before making final decisions.