Dividing stock compensation during the divorce process is one of the most complex issues clients face and it is important divorcing parties seek the proper advice and expertise. Within this article the term “stock options” and “stock compensation” are interchangeable and describe company benefit plans that award employees through stock compensation over a length of time called the “vesting schedule”.
Court Experience with Stock Compensation is Limited
Not until the early 1980s did courts begin to consider stock options assets of the marital estate subject to division. Because of the newness of stock compensation plans and the courts’ delayed consideration of them, there are limited guidelines on how to approach these plans when dividing the marital assets.
The complexity of these company plans and the number of different rulings make it very difficult for many attorneys to correctly advise their clients of general apportionment of these plans and at times these compensation plans are improperly treated as commonplace stock accounts or are even neglected entirely in the marriage dissolution.
Courts must determine two things before they can distribute the stock options between the parties. First, the court must classify the nature of the stock options and whether it is marital property subject to the division of assets in the divorce. Secondly, and often most complex, the court must determine how to value the stock option.
Before the parties can discuss the division of the options, the court must determine whether the stock options are marital property. In California and other community property states, marital property includes any assets acquired by either spouse after the marriage.
At issue in much of this analysis is the vesting schedule associated with stock compensation. While the stock was awarded during the marriage, the date of its vest may not happen until after the separation. The question becomes, for the unvested shares granted during the marriage, what portion is marital property and what portion separate property. It is important to note, that terms used to describe the stock options (vested, unvested, restricted, etc.) are solely marketplace terms and not definitive in the courts’ classification of the property.
Stock options vested during the marriage are generally considered a marital asset. However, for unvested options, no prevailing trend exists among the majority of the courts making it very difficult for divorcing parties to evaluate the potential financial outcome of the asset’s division.
Like classification, there is no uniformity in valuation of stock options and the methods applied can be complex. These complexities and the substantial discretion family law judges have in structuring divorce decrees makes the financial outcome of stock compensation division even more uncertain. Typically, the value of the vested options are addressed in the marriage divorce decree, and sometimes judges consider the value of unvested options that were granted during the marriage.
Courts have applied two common formulas to determine, if any, the marital value of the unvested stock options. The intrinsic value rule and the Black-Scholes formula. Neither method has dominated the divorce landscape.
The intrinsic value, a straightforward analysis, is the current market price of the stock minus the exercise price and multiplied by the number of shares of stock in the options. For example, the intrinsic value of 20,000 shares of a stock with a fair market value of $25 and an exercise price of $15 would be calculated as such: ($25 market price – $15 exercise price) x 20,000 options = $200,000.
The Black-Scholes method, one of the most complicated formulas courts deal with, attempts to determine the present value of the option considering numerous factors including: the exercise price, the current stock price, the dividend yields for particular stocks, the option term, the market value of the underlying security, the current risk-free rate of return, and the underlying volatility. This method usually requires hiring an expert.
There is no bright line rule for either classification or valuation of stock option plans. Additionally, the plans themselves and their valuation can be complex. Consequently, it is vital for divorcing clients with stock compensation to seek experts who can concisely explain to the court what rules should apply and why.
In some dissolutions, the date that parties separate is a crucial issue. This is because by law, the marital ‘community’ ends on the day when parties separate. The end of the marital community means that income earned or possibly property purchased after that date might belong to only one person. The date that parties separate also determines the length of the marriage, which potentially affects the length of spousal support or whether or not spousal support can be terminated.
While each situation is different, the date of separation can be a very contentious issue in a divorce and has the potential to derail settlement. For example, let’s say that Ms. Smith is the primary wage earner for her family. She believes that she and her husband separated in January 2016, when she packed most of her belongings and began to spend many nights at her friends’ house and on the sofa at her office. Ms. Smith did return to the marital home for dinner at least once a week. She stopped by to do her (and sometimes her estranged husband’s) laundry. The couple also decided not to tell very many people about their impending divorce and the couple attended many social and business related events together. Mr. Smith works, but earns approximately 20% of Ms. Smith’s income. He believes that the parties separated in August 2016, when Ms. Smith finally rented an apartment.
In March 2015, Ms. Smith received approximately $100,000 in commissions from work that she did from January 2015 until March 2015. Since Ms. Smith believes the date of separation was January 2015, she also believes that the $100,000 is her separate property. Conversely, given his belief that they separated in August 2015, Mr. Smith believes the $100,000 is community, making him entitled to $50,000. To complicate matters further, in March 2015, the parties would have been married for 10 years. Under California law, a marriage of 10 years or longer is considered ‘long term,’ which could greatly affect spousal support.
The facts of this particular situation are such that, a court could find for either party in terms of a date of separation- it could be January or August. One person ‘wins’ and one person ‘loses.’
Does this sound complicated? The above situation occurs more often than you might think. Many people do not wish to be a part of the adversarial world of litigation, where the outcome is all or nothing and where they risk making enemies of each other. Enter the Mediation process, where the Smiths can meet with a skilled mediator trained in family law. The mediator can assist the Smith’s in crafting a solution to their complicated situation that works for their family. A global solution can be reached that takes into account the income (i.e., property )as well as support. In mediation, complexity of the matter at hand is not the issue, the willingness of the parties to listen to each other and reach an equitable solution is the definitive factor.
The transition of divorce/separation is monumental, affecting every aspect of life and requiring attention and care to a multitude of details and variables. Custody, visitation schedules, dividing assets, moving, deciding who gets what, sharing the news with family and friends and schools and the random strangers who ask what your family is doing for the holidays or summer break. Any one of those pieces can feel overwhelming and exhausting. With all of the families I’ve supported who are dealing with this transition, I always encourage them to surround themselves with lots of support. We aren’t meant to do this alone.
Over the last few years, I’ve come to learn about a variety of relevant, helpful resources for families who are in the process of divorce/separation so I thought I’d share the best with you:
Groups, Classes & Workshops
Other Support & Professionals
Remember, you are not alone. If you have questions about any of these resources or want to talk further about finding the support your family needs, please feel free to contact me.
All my best for your home,
I hope the questions from the last blog post were helpful in considering how you want your children to hear the news that your relationship is ending/has already ended. I think this is one of the last conversations a parent wants to have with his or her child. However, when children are left to wonder why their parents are moving into separate homes, they can easily become confused, scared, resentful or anxious.
One of the most important tools in discussing divorce with children is a “divorce narrative.” Simply put, this is the story of what happened to your relationship. Children need a way to organize and make sense out of what is happening to their family, and since we as humans are story-telling beings, stories often provide an avenue for understanding complex concepts and ideas.
Here is one example of a divorce narrative (for a heterosexual couple) that could be shared with a younger child:
“Do you remember how Mom and Dad met? [Either child answers or you share a brief version] We met a long time ago and fell in love and decided to get married. And then we had you! That was one of the best parts of us being together. [You may decide to share a few reflections of the day your child was born]
We really, really loved being parents, but we were having a really, really hard time loving each other. We would argue a lot and had a really hard time figuring out how to stop arguing [This is where each partner can take responsibility for certain decisions/behaviors/etc.]
I said some really mean things to Mom/Dad.
And I did some really mean things to Mom/Dad.
We tried to get some help to try and figure out how to stop fighting. But I didn’t want to make things better/we gave up trying to make things better/we decided that being married wasn’t a good idea any more.
So we’ve decided not to be married any more. We’re going to live in separate houses and do things apart now.
BUT [and this part is KEY] we will ALWAYS be your parents. That never stops or changes. Even though Moms and Dads can stop being married, they will NEVER stop being Moms and Dads. We love you so much and know that this is going to be hard to not see Mom and Dad married anymore, but we will always be here for you.”
That is a hard, painful story to tell. But your child needs to have a story that makes sense.
Here are a few questions to help you start crafting your own divorce narrative:
** A few important consideration:
As co-parents, you may (and probably will) have different ideas about why the marriage ended. For the sake of your child(ren), can you agree on a narrative?
Next week, we’ll continue to look at some other helpful tools to use in supporting your child throughout this process.
By Alair Olson
Most people don’t realize that when they file the paperwork for a divorce, in California, automatic temporary restraining orders (TROs) are triggered.
One of the initial forms that you must file is the Summons, otherwise known as FL-110. The second page of the Summons lays out all the TROs. They are important to note because if you choose not to comply, you could find yourself in hot water. When your spouse is served, these orders become active order preventing certain actions for both you and your spouse.
Glad you asked. There are four of them, they include:
The great thing about our mediation process is that your entire dissolution is, generally completed in 2-3 sessions. You can reach written agreements immediately about pressing issues and move on to get your entire dissolution settled. Deciding on mediation is such a good feeling. Can you imagine living under these automatic temporary restraining orders for years? Neither can I. If you are thinking about a divorce at this time. Think mediation. The hassle it saves begins at the filing.
A new study just out confirms what those of us in the industry already knew about…..divorce spikes at certain times of the year, you can bank on it! The University of Washington asked the question, Is Divorce Seasonal?…the answer is yes, yes it is.
The study was a longitudinal study where researchers looked at divorce filings between 2000 and 2015. When they compiled their data they found that divorce spikes in March and August.
The idea is that during the Christmas holiday and Summer break, folks feel like they want to stick it out and make it work. The divorce cycle is based upon, what they termed a “domestic ritual” calendar. Both Christmas and summer are hopeful times where there is anticipation and exciting family gatherings and events to look forward to. Couples often believe that their relationship may be mended by these family times. There is an idea that this may bring on a new beginning. There is hope and optimism about the future. Hence, the rate of filing for a divorce during the Christmas season or at the start of summer is lower.
The researchers suggest that the spike in August is in response to summer disappointment and an attempt to file before the new school year begins. So, it would seem to follow that filings would be high around January, or February. How can they explain March? This is how…Despite, a supposed disappointing holiday season, there is no impetus to file quickly as there is in August. Also, after the holidays, it may take folks a while to get their finances in order. Makes sense, some Christmas’s were so good financially (that is, we adults went crazy gift giving), only to have a January that was lean and mean.
My suggestion is that if you find yourself this month, or next March feeling like divorce is an option, don’t just go file, consider mediation. Divorce is real and you are not alone, obviously. Thinking through your options before reacting to gut instinct immediately will often save you in the long run.
I have a terrible habit I have to admit to you. I love television. I grew up in the 1980s. What can I say? That is why I get excited when I see a new show on television and especially excited when it is in our industry. A “Divorce” TV show has me intrigued. You?
So, even if a “Divorce” TV show sounds….well depressing? This one doesn’t seem to be. I didn’t even have to read two paragraphs into the storyline and I was hooked.
You all will need to check out the show and then check back with the blog. We will have to check back in to see how close this new show mirrors reality. I can’t wait!
A Parenting Coordinator, like the concept of nesting discussed in a previous blog, is a tool used more often in the mediation room than the courtroom. Yet, it is one that can make all the difference if there is contention surrounding the parenting of your children.
When you divorce with children. There is always the possibility of conflict. In fact, the more moving pieces in any divorce, statistically, the more likelihood that something will be contentious. You love your child more than anything. Because you do, you have strong emotional responses to all sorts of scenarios that come up, from schooling to sports, to clothing choices….let alone custody and support problems. A parenting coordinator is designed to keep you two out of court because they act as a neutral third party who knows the facts of your case and can guide you both in the most reasonable course of action.
Mediation is the first positive step that will create the least conflict. Let’s face it, the least conflict there is between you and your spouse, the better it is for your child. In the mediation setting, you will formulate a parenting plan. The goal of the parenting coordinator is implement this plan in a way that assists you two in forming healthy meaningful relationships with your child.
How do you know if you need a parenting coordinator? It is often hard to tell. Obviously, there are times when the contention is ubiquitous. There is no doubt that a couple could benefit from utilizing this tool. If you and your spouse are on the fence, I would examine your general conflict level. I would examine whether or not there has already been conflict about the children. However, do not discount your gut instinct.
Finally, if all else fails and you go to mediation and don’t think a parenting coordinator is necessary and then all of a sudden you are blindsided by shenanigans you couldn’t imagine…..it is not too late. You can always agree to bring in a parenting coordinator. They reduce conflict and litigation whether employed up front or after the fact.
Nobody goes into a marriage thinking they will get a divorce. And then,….there you are, faced with the worst. If you have never been here before, and even if you have, it may be a confusing place to be. In addition to all the emotional tumult, there are technical issues to consider…fiduciary duties….general restraining orders…etc. etc. Even without children it can be an overwhelming and daunting process. The bottom line is that if you are considering a divorce, you must prepare for a divorce. Otherwise, it will feel like a wave overtaking you and sweeping you away.
With these tips in your pocket, you won’t need to worry about the tidal wave of divorce. You can pick up your surfboard and ride the wave to the shore your your new life.
Our last blog focused on divorce cost in California. We touched a bit upon what is the divorce mediation cost vs. other methods of divorce, but didn’t really delve in to look at, particularly, how much does divorce mediation cost?
No matter what version of divorce mediation you opt for, you are already ahead of the game in so many areas over litigation. You should never underestimate the power of you being able to create your own future.Yet, the cost difference is nothing to be shrugged at. It is almost invariably going to be less to go through mediation than the litigious route.
Mediation by the hour: There are all sorts of mediation for divorce. You can go a mediator that charges by the hour to conduct mediation on single issues that you can’t find resolution on. These mediation firms often do all sorts of alternative dispute resolution, from mediation to arbitration. They, often, will mediate many types of issues from neighbor disputes to divorce. The cost ranges around $175-300 per party, per hour.
Mediation Only: There are other mediation firms that will conduct the mediation for you. At the end of the day, you will receive a Marital Settlement Agreement (MSA). You will be responsible for all the initial filings, the financial disclosures, and ancillary paperwork. You will need to file all paperwork and make sure all service of process is conducted properly. Some of these specialize in divorce, others don’t. Sometimes they have packages that cover the mediation and MSA preparation, sometimes they are completely done on an hourly basis. Even with a flat fee, this mediation is likely to run you between $2500 and $6000, depending upon the firm and the complexity of your case.
Full Service Mediation: Divorce mediation cost is at its most efficient when you come to a full service mediation firm, like Pacific Coast Mediation. These firms, will generally specialize in divorce because they are giving you the red carpet treatment. Their prices include creation, filing, and service of all your paperwork. At Pacific Coast Mediation, our flat fees include everything. You are completely taken care of. This high end service is surprisingly affordable. It runs between $2000 and $6000 per person. Most clients will pay around $3000 per person.
You know mediation is the way to go for so many reasons! Now you know why cost savings is one of them.