Determining separate and community property during divorce – stock awards & stock options

Stock awards and stock options are given to employees to encourage them to stay on the job and motivate them to perform at a high level. They are granted and then vest over a pre-determined number of years. When people divorce and stock awards or stock options are still vesting, some of the stock awards or stock options are community and some are the separate property of the employee. The determination of the separate/community characterization is based on a Washington State court case named Short.

Basically, the first stock award or stock option that vests after the date of separation contains both separate and community interests. The stock awards or stock options that vest before the date of separation are 100% community interests and the stock awards or stock options that vest after the date of separation are 100% separate property interests of the employee.

Vesting of stock awards and stock options

The value of the “first vest” is a pro-rated calculation with the numerator the number of days from the grant date to the date of separation divided by the number of days from the grant date to the date of the vest. For example, if the grant date is June 30, 2014, the date of separation is June 30, 2015 and the “first vest” date is June 30, 2016, then 50% of the stock award or stock option is community property and 50% is the separate property of the employee. The stock award or stock option is valued at a current date based on the current stock value less income and social security taxes.

Generally, stock awards are considered the earnings of the employee for child support and maintenance purposes. Stock options are generally considered property until they are exercised.