How are Stocks Split in a Divorce?
The need to divide stocks and complex equity holdings is common in Los Angeles divorces.
Recent changes in employee compensation packages, particularly in the tech industry, have brought this issue to the forefront of modern divorce. This becomes more complicated when dealing with assets like phantom stock, stock options, unvested securities, and non-transferable securities.
The first step in figuring out how stocks will be split in a divorce is to determine who owns them. Stocks might be the separate property of either spouse, or they may be community property. They may contain mixed separate and community property components.
Generally, in a California divorce, assets acquired during marriage are presumed to be community property.[i] Such assets are split evenly in divorce. Assets owned by a person before marriage, assets acquired by gift or inheritance, or assets acquired after marriage is separate property.[ii]
What does this mean? It means that, generally, the marital estate will not have an interest in a party’s premarital portfolio. For example, if a spouse inherits shares of stock prior to marriage, this stock and the appreciation therefrom will likely be considered separate property.
But take note: it is possible to inadvertently create community property interests in separate property portfolios. If one spouse greatly increases the value of a separate property portfolio through his or her labor and effort during the marriage, beyond the its natural appreciation, the community can, arguably, acquire an interest in the portfolio.[iii]
Usually, the community interest is determined by the timing and source of the acquisition. For example, if an employee-spouse receives a bonus during the marriage that consists of company stock, this stock and the appreciation therefrom will likely be considered community property.
This concept applies to stock options and unvested securities as well. The key question is when a stock option or other interest is earned. This can be more complex than characterizing and valuing stocks owned outright. Problems can arise when the spouses have disparate positions about the worth of these interests.
Courts determine the value of stock options and unvested securities on a case-by-case basis after a thorough examination of the facts. An expert might be needed for this purpose, because, for example, when an option is granted, the ultimate stock price is not yet known. Because valuing stock options can be speculative, any theory of value must have a firm logical basis in the facts.
In marriage settlement agreements, parties can choose to divide stocks in-kind, which means dividing up and transferring the shares. Alternatively, they can choose to liquidate the stock and disburse their relative community and separate shares in cash. Another option is for one spouse to buy out the other. Further, they can continue to jointly own the stock and split upon sale in the future. Generally, the court will not get in the way of a parties’ agreement for a buyout, sale, division, or deferral of the sale.
If the parties cannot agree on how to split stocks, a judge will decide at a trial. In dividing the assets and interests of the community estate, the court generally values as near as possible to the time of trial.[iv]
[i] California Family Code §760 [ii] California Family Code §770 [iii] See, Beam v Bank of America (1971) 6 C3d 12, 17en [iv] California Family Code §2552
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