If You're Considering Divorce, Know Your Options with Stock Options

By Catherine Shanahan On 02/05/2021

Digging a little deeper into common missteps so you can better understand what you need to know about stock options if you’re considering divorce.

We recently worked with a gentleman – we’ll call him James – who was frustrated because the courts were closed during the pandemic and his divorce wasn’t going anywhere. He told his attorney that he planned to sell some stock options to pay off marital debt. The attorney thought it was a great idea and encouraged him to proceed.

We asked James a lot of questions. What options did you sell? When were they granted? Were they pre-marital or marital? When did they vest? Have you been calculating gains correctly when filing tax returns?

He was surprised because his attorney didn’t ask any of these questions. Poor advice, combined with a general lack of knowledge about stock options, led James to make poor, costly decisions.

Let’s dig a little deeper into common missteps so you can better understand what you need to know about stock options if you’re considering divorce.

1. Knowing the Tax Implications

Selling stock options to pay off marital debt is not necessarily a bad decision. However, if your accountant isn’t experienced with stock options, you can end up overpaying your taxes. In James’ case, his accountant used the grant price as the cost basis instead of the exercise price.

For example, suppose the grant price is $10, the exercise price is $40, and the sale price is $80. James was taxed on a tax gain of $70 (80-10) instead of $40 (80-40). As a result, James paid nearly twice as much as he should have in taxes.

Fortunately, most stock options were sold in 2019, so we referred James to a new accountant who will be able to file an amended return, allowing James to recover a good portion of what he overpaid – about $300,000. However, overpayments from several years prior will never be recovered.

2. Knowing the Grant Date

When acquiring stock options, keep a notation of the grant date. If the date is before your marriage or after your separation date, the shares are considered pre-marital. If the date is during your marriage, the date is considered marital.

James had acquired stock options before and during his marriage. He decided to sell pre-marital shares because it meant paying less in taxes. However, because pre-marital shares would have remained separate property, he could have kept those shares for himself post-divorce.

Because he was getting divorced, he would have been much better off selling marital shares. James would have paid a little more in taxes, but keeping the pre-marital shares would have allowed him to keep significantly more money in his pocket.

3. Knowing When Your Spouse's Options Are Granted

Another My Divorce Solution client – we’ll call her Beth – decided in January that she wanted to proceed with a divorce. When she discussed divorce with her husband, he was adamant about separating on February 1. She agreed because she was eager to move forward.

Here’s the problem. Her husband’s employer grants stock options every year in early February. Any options he receives after the separation date will be non-marital and considered separate property.

Obviously, if you’re at risk, you might need to remove yourself from a dangerous situation as quickly as possible. If you have a choice, time your separation after stock options are granted. Make sure you know the financial impact before agreeing to a separation date.

4. Knowing How Stock Options Affect Equitable Distribution or Support Calculations

When you receive stock options, they’re included on your W-2 as income. You need to determine if those options should be considered for equitable distribution or support calculations. This is often overlooked because many people just don’t ask about stock options.

Of course, you probably won’t be receiving that income every year. Will that money be included for child support, for example, or do you get a portion for equitable distribution? You want to make sure you account for stock options in support calculations. This could have a significant impact on cash flow and retirement planning.

Final Thoughts

Divorce is like a swimming pool. Most people just jump in so they can get the hard part finished quickly and enjoy themselves. In some cases, attorneys looking for a quick settlement encourage this approach because they don’t see the full financial picture.

Unfortunately, you could very well end up regretting hasty decisions that you made without fully understanding the repercussions.

When it comes to stock options, lack of patience and knowledge often result in overpaying taxes, giving away options that you’re entitled to keep, or failing to account for stock options because you didn’t know they exist.

A Certified Divorce Financial Analyst (CDFA) knows what questions to ask and how to avoid these and other pitfalls. If you’re considering divorce but need help understanding the financial impact, consider contacting a CDFA professional

Catherine Shanahan, CDFA

After 25 years in the financial industry, having raised five children and endured her own experience with divorce, Catherine became a Certified Divorce Financial Analyst (CDFA), trained Mediator and Daily Money Manager (PDMM). Catherine is collaboratively trained and was a member of the Bucks County Collaborative Law Group. She is a member of the American Association of Daily Money Managers (AADMM) the Institute for Divorce Financial Analysts, and the Association of Divorce Financial Planners (ADFP).

Catherine is fully dedicated to helping clients understand and navigate all aspects of divorce including planning a secure financial future post-divorce.

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Tagged with: divorce, stock, options, finance