Division in a high-asset divorce can be complex, especially when stock options factor in. Stock options, which allow the holder to buy shares, come with unique tax implications. Knowing how these tax issues play out can help ensure a fair division of assets.
What are stock options?
Stock options are a benefit in many high-earning careers, like tech and corporate environments. They allow employees to buy company stock at a set price, usually below market value. In a divorce, the court may consider stock options community property or separate property.
However, this depends on the timing of the grant. If the company granted the stock options during the marriage, they likely qualify as community property and are subject to division.
Tax consequences of stock options
The tax consequences of dividing stock options vary based on the type of stock option. The two common types of stock options are non-qualified stock options (NSOs) and incentive stock options (ISOs). Both are taxed differently.
When NSOs transfer during a divorce, the recipient spouse gets taxed on the difference between the exercise price and the market value. ISOd are more complex, as they can trigger the Alternative Minimum Tax (AMT). Transferring ISOs may result in immediate taxation for the spouse exercising the option. Additional taxes may also apply based on how long one party holds the stock.
Avoiding tax surprises
Dividing stock options without considering tax implications can result in an unfair distribution of assets. Both parties should consider who will pay the taxes, the timing of the exercise, and whether they should work with a financial expert. To avoid tax surprises, working with a tax professional is wise when stock options are part of the divorce settlement.
Planning for future tax events
While stock options can be a valuable part of a high-asset divorce settlement, they come with risks. Planning for future tax events and understanding the long-term tax consequences is essential for both parties.
