As part of evaluating your total marital estate, various types of stock might come into play. Two of the most confusing of those stocks include stock options and restricted stock, which need special evaluation in your divorce and asset division. In this post, we decode what these stock types mean and some common pitfalls to watch out for as you evaluate how to handle them in your divorce. What are Stock Options? Stock options are rights and agreements that allow an employee to buy a company stock at a predetermined price in the future. Stock options are often part of a total compensation package to employees of publicly traded companies. Stock options are considered “exercised” when you purchase shares of a stock at the set price defined in your option agreement or grant. Often you will “exercise” or buy stock when your “exercise price” is lower than market price – this provides an immediate gain. However, if the exercise price is higher than the market price the options are considered to be “under water” and essentially worthless because the shares could be purchased on the open market without a benefit of the stock options. Valuing stock options can be challenging because the future stock price is unknown and can fluctuate up or down. What is Restricted Stock? On the other hand, restricted stock is a form of equity compensation. Often called restricted stock units or RSUs, shares are granted to an employee but subject to a vesting schedule and other possible stipulations before the employee becomes an actual owner of the stock shares. Employees of publicly-traded or private companies may be awarded RSUs that vest at certain employment milestones (one year, three years, five years, etc) and any unvested funds are lost completely upon termination of employment. Avoiding Pitfalls There are a number of financial pitfalls to avoid while managing how to evaluate stock options and RSU’s throughout your divorce. Don’t Skip Discovery –If you haven’t been closely involved in your finances during your marriage, or aren’t sure if your spouse has stock options or RSUs, you may have to request a formal discovery of documents to learn if they exist. Often, stock options and RSUs aren’t on tax forms, W2s, or other documents until exercised or vested, so you can’t obtain information on these financial benefits through normal financial reviews. If you and your attorney request a discovery, you may be able to get access to this type of information through requests for information to HR or have an attorney send a letter to subpoena records detailing all benefits provided by your spouse’s employer. Don’t Ignore Because Complex- Avoid the pitfall of ignoring these assets because they are complex, confusing, or require additional discovery steps. This can be compounded by not defining a clear value for these stocks, especially if they are not yet fully vested or private stock. In these cases, stock options and RSUs might not be subject to division and it is best to discuss this with your attorney and financial planner. Don’t Forget About Tax Consequences- Lastly, don’t overlook the tax consequences of division, which can be complex with these types of investments. As mentioned above, when stock options or RSUs are vested or sold, they are usually taxed to the spouse who is employed by the company that awards them. Therefore, any proceeds provided to an ex-spouse in an asset division should be after-tax proceeds, and it is essential to determine what percentage after-tax proceeds will be. Stock Options: The tax consequences are different for ‘qualified stock options’ versus ‘non-qualified’. Non-qualified options can trigger taxes at higher ordinary income rates when the options are exercised and are subject to capital gains tax rates when sold. Qualified stock options can qualify for lower capital gains tax rates if the options have been held for 2 years after the grant date or one year after the options have been exercised, whichever is later. Restricted Stock Units (RSUs): RSUs are taxed as ordinary income at the time of vesting. Don’t Overlook Ownership Issues- There can also be ownership issues with these types of investments. For instance, usually ownership can not be transferred to the non-employee spouse post-divorce. This means one spouse would need to rely on the employed spouse for future information, to carry out liquidation instructions when provided, among other items that are required. This can be difficult to do if the relationship is strained. There is much more to uncover relative to stock options and RSUs and working with a financial professional alongside an attorney can ensure that you get a fair portion of these important assets without significant tax consequences. The discovery and subpoena process can take extra time, so it is best to start the process early to ensure you have the time you need to negotiate the best division of these assets based on your financial goals. Contact A.M Financial to schedule a consultation where we can learn more about the circumstances surrounding your divorce and support your needs on this topic and more.