During high net worth divorces when well-compensated spouses divorce, one issue that may arise is how to deal with stock options held by a spouse as part of his or her benefit package. In Pennsylvania, such stock options are considered a form of deferred compensation designed to induce the employee/spouse to remain loyal to the employer; accordingly, Pennsylvania courts view stock options as analogous to pension benefits, and thus marital property. The trick is to value the options at the time of divorce, even though it is unlikely that the options will be exercised at that date.
As an initial matter, it is important not to ignore the fact that a spouse has stock options. Just because this an option isn’t exercisable until the future, it is still often a source of tremendous wealth. If your spouse has stock options, you certainly want to take the time to explore if any portion of the options are marital property and subject to division.
The simplest method of valuation is to find the difference between the exercise price of the stock option and the current market price of the stock. Although simple, this method is entirely speculative, because the spouse holding the options might die, or lose his or her employment, before the options vest, or are exercised. Alternatively, the employer might revoke the options, or the entire program.
A better method, though still speculative, is the discount to present value method, whereby the option is first assigned an intrinsic value, and then discounts are applied to account for items such as taxes due on sale, lack of marketability or risk of forfeiture. However, problems remain in that the court must guess as to taxes that will be due, depending on the final exercise price. Moreover, the court must pick the correct discount rate for lack of marketability, forfeiture, risk of non-vesting, and mortality. Ultimately, competing experts would be required, each opining as to the likelihood the employee would remain employed, and under the program, and what discount rate is appropriate.
Few things in life are as traumatic, and potentially economically destructive, as divorce. For those facing divorce, fears abound regarding issues of the distribution of property, alimony and support, custody of children, and the maintenance of insurance, just to name a few.
Wilder, Mahood, McKinley & Oglesby is one of the oldest firms in Pittsburgh focusing on family law issues. Our founding partner, Joanne Ross Wilder, penned the handbook used across the state by practitioners and judges in the family law arena. Our attorneys, Brian E. McKinley ,Darren K. Oglesby and Bruce L. Wilder update the book annually to keep current with changes in the law and society. To consult with a Pittsburgh divorce attorney about your options in a divorce, contact us online or by calling 412-261-4040. We represent business and professional clients with family legal concerns across western Pennsylvania.
Additional Resources:
What are Precautions to Take When Entering a High Net Worth Divorce?
Top 10 Questions to Ask a Divorce Attorney
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