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Stock options and restricted stock

Highly compensated employees are often the recipients of either stock options or restricted stock awards. Many companies are now awarding restricted stock rather than options. Stock options give the employee the right to purchase stock are a certain price (“strike price”) in the future but creates no current ownership interest. There is a vesting schedule such that the stock and an expiration date for the exercise of the options. Restricted stock is stock that the employee owns but is restricted in terms of when it will vest and can be sold. The tax consequences of each of these assets is different.

Both restricted stock and stock options can be marital assets if they were awarded or granted during the marriage; however, they cannot be transferred or assigned. Therefore, the employee-spouse must hold the non-employee spouse’s share of the options or stock in what attorneys call a “constructive trust,” meaning that the employee-spouse will still own them but hold them for the benefit of the non-employee spouse.  This arrangement is fairly complicated and involves keeping the parties entangled for many years into the future. There are methods to value these assets and to offset them against other assets.

Understanding the vesting schedules, values and tax consequences of the stock options and restricted stock is very important for counsel representing each of the spouses. These assets can have significant value or, if the company is doing poorly, little or no value. They will be an important part of understanding the marital estate and an essential component of settlement negotiations or litigation.