Divorce and Dividing Stock Options

Divorce and dividing stock options are topics I frequently review with clients in my Nashville and Brentwood, TN offices.  It is important to understand the stock options are tied to the spouse who is emplyed by the company issuing the options and typically cannot be transferred to the other spouse. 

The number of options can be divided where each spouse receives options.  When the options are fully vested and cashed out, this is a taxable event for the spouse who is employed by the company issuing the options. 

Both soon-to-be exspouses should understand the tax impact of cashing out the options before the transaction takes place.  The addition of this income is a taxable event that may result in the spouse (employee who receives the options from the employer) being taxed in a higher bracket.  Therefore, the spouse who is not the employee but, wants to cash out the options will receive less net revenue because more taxes are withheld.

It is often beneficial to wait to cash out options until the end of the calender year.  This allows the employee spouse to know their total YTD income for the year (including bonus), tax deductions and potential tax impact.  Many clients decide to cash out some options in December of one year and January of the following year to minimize taxes.

Being aware of these tax consequesnces allows you to make smart choices and yes, get a smart divorce... it is possible.