In such a competitive environment for employees as currently exists, some employers are offering stock ownership as a way to attract or retrain key employees. As a sign-on bonus or a reward for a job well done, stock shares provide a substantial incentive as they help employees amass wealth over their careers.
Awarded shares are often “restricted,” in that there is a period of several years after they are awarded until they are “vested,” that is, the employee owns and can sell the shares. If an employee leaves the firm before vesting or does not achieve certain performance goals, the shares are forfeited.
When restricted shares vest, the entire value of the shares is included as taxable ordinary income for that year, even if the employee chooses to sell the stock immediately upon vesting. If the employee holds the stock, they may incur additional taxable capital gains—or tax-deductible losses—when they do sell the stock.
Allotting shares in divorce
The challenge related to stock ownership in divorce is determining what shares, if any, will be included as the employee’s income, and what shares, if any, would be considered marital property and subject to division*. Because restricted stock does not appear on tax returns or W-2s other than for the year they vest or are sold, they can be overlooked if the counsel to the employee’s spouse does not request the documents that reveal their existence, such as an offer letter, employment contract, or award letter, to name a few.
When an employee is awarded restricted shares, they are also provided a grant schedule, which details the number of shares granted and how and when they vest. The timing of when these shares are earned and how vesting numbers are calculated is key to determining the value for a marital estate. Considerations include:
- Does the stock vest over time or is it contingent on meeting certain performance metrics?
- Was the amount of the reward based on past performance or intended to award future performance?
- Was the stock granted during the term of the marriage? Shares awarded during the term of marriage can be determined wholly or partially marital property.
*It is important to note that divorce laws are unique and specific to each state.
Dividing stock shares
The next question is how to divide the shares. Most stock award plans do not allow restricted shares to be transferred by name to the non-employee spouse. One option is to determine the approximate value of the marital shares and offset that number with something else in the estate, but that is not always a feasible solution.
Sometimes the non-employee spouse is awarded the value of his or her portion of the marital shares when they vest. However, the financial award to the non-employee spouse should be adjusted to reflect the employee’s responsibility for the tax liability for the vested shares.
IMPORTANT DISCLOSURES
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.
The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
