Stock Options and Differed Compensation in Divorce

Dividing Stock Options in Divorce: What You Need to Know

Dividing stock options in divorce is often one of the most complex financial challenges couples face. Equity compensation, like stock options and restricted stock units (RSUs), can significantly impact the outcome of a divorce settlement, especially when future value and tax implications come into play.

Expert Insights from FinStream

In this informative video from FinStream, financial journalist Bob Powell interviews Philip Herzberg, CFP®, CDFA®, CTFA, AEP®, and lead financial advisor at Team Hewins. They break down how stock options and deferred compensation are treated in divorce cases—and why understanding these assets is crucial for both spouses.

Common Types of Stock Compensation

Companies use equity compensation to attract and retain top talent. The most common types include:

Non-Qualified Stock Options (NQSOs)
Incentive Stock Options (ISOs)
Restricted Stock
Restricted Stock Units (RSUs)

Each of these has different tax rules and legal implications, especially during divorce.

Key Considerations When Dividing Stock Options

Understanding how to divide stock options in divorce involves careful analysis of:

Vesting schedules
Transferability
Tax consequences
Current and projected value

For example:

NQSOs are taxed as regular income when exercised, increasing taxable income.
ISOs may avoid standard income tax but can trigger the Alternative Minimum Tax (AMT).
Most stock options are non-transferable, particularly if linked to future performance milestones or IPO events.

Why Valuation and Strategy Matter

Accurate valuation of unvested or private company stock options is essential. These assets may lack immediate liquidity but can represent substantial future wealth. Working with a Certified Divorce Financial Analyst (CDFA®) ensures that stock options are divided equitably and strategically.