Employee compensation increasingly includes benefits that may not appear in an ordinary paycheck. Stock options are one example.

When stock options were earned partly during marriage and partly outside the marriage, determining the community property interest can become complicated. California courts may examine why the options were granted and the employment period they were intended to reward.

When Can Stock Options Have a Community Property Component?

Stock options can have a community property component when the work performed to earn them occurred during the period between marriage and separation.

The difficulty arises when an option does not fit neatly within that period.

For example, an employee may receive an option before separation that does not become exercisable until after the spouses separate.

The source materials explain that courts have broad discretion when allocating community and separate interests in these types of options.

Determining the proper allocation requires examining the circumstances surrounding the grant rather than simply looking at the date the option was issued.

Why Were the Options Granted?

One of the most important questions is what the employer intended the stock options to accomplish.

Options may function as compensation for work the employee already performed. They may instead be designed to encourage the employee to remain with the company and perform services in the future. Some awards may serve both purposes.

This distinction can affect the method used to determine the community interest.

When options primarily reward past employment, the relevant calculation may recognize employment beginning before the option was actually granted. When options primarily serve as incentives for future work, the calculation may focus more heavily on the period beginning with the grant.

Understanding the employer’s compensation plan and the terms of the particular award can therefore become important.

What Records Can Help Evaluate Stock Options?

Stock-option analysis often requires more than reviewing a tax return.

Relevant records may include option grants, restricted-stock grants, vesting schedules, compensation agreements, plan documents, deferred compensation information, employment records, and documents explaining the terms and purposes of the awards.

An accountant or another professional familiar with employee benefits may also be needed to determine the community interest, evaluate possible methods of division, and analyze tax consequences.

Stock compensation can also be relevant to support. Depending on the circumstances described in the source materials, vested and matured stock options that are legally available to an employee may potentially be considered when evaluating income for child support.

Stock Options Can Raise More Than One Divorce Issue

Stock options should not automatically be classified as entirely community or entirely separate property based solely on the grant date.

The purpose of the award, employment history, vesting requirements, date of separation, and other circumstances can all affect the analysis.

For spouses whose compensation includes significant equity awards, identifying and gathering information about those benefits early can help prevent valuable employment compensation from being overlooked during property division or support proceedings.