THE CPA CONSULTANT

February 2001

Stock Options as Marital Property

By Louis J. Cercone, Jr., CPA/ABV, Brisbane Consulting Group

The number of Americans holding stock options has soared from approximately 1 million in 1992 to an estimated 10 million today. Most stock option plans are restricted whereby the employee must remain with the company for a time before the options vest. Therefore, one issue before divorce courts is the extent to which an interest in a stock option plan provided by a spouse’s employer constitutes marital property when the plan comes into being during the marriage but is contingent upon the spouse’s continued employment with the company after the divorce.

The New York Court of Appeals in Dejesus v. Dejesus [90 NY 2d 643 (1997)] found that a stock option plan granted as compensation for past services or as an incentive for future services may constitute marital property, even when the titled spouse can realize the benefits only after the divorce.

Background

Approximately seven months before marrying on October 14, 1979, Wilfred Dejesus began employment with Astoria Financial Corporation. Over the course of the marriage Dejesus was steadily promoted, and in December 1993 he was named first assistant vice president.

On November 18, 1993, Astoria granted Dejesus two restricted stock benefit plans: an incentive stock option plan (ISOP), and a recognition and retention plan (RRP). The ISOP provided an option to purchase a total of 3,053 shares of Astoria stock at $25 per share, exercisable in equal annual installments on January 10, 1997, 1998, and 1999. The RRP provided for the outright receipt of a total of 2,036 shares of Astoria stock in three equal installments, beginning on January 10, 1997. Both plans were contingent on Dejesus’ continued employment with Astoria, and both were described as an incentive for corporate officers.

Dejesus’ wife commenced a divorce action on July 30, 1994. The parties stipulated to maintenance, child support, and the equitable distribution of all marital property except the stock option plans. The issue before the trial court was how much of the plans should be considered marital property subject to equitable distribution.

Trial Court and Appellate Decision

The trial court found the stock option plans to be “tangible benefits which were bestowed on defendant [husband] during the marriage.” Consequently, the trial court deemed all of the stock option plans to be marital property and to be divided equally, with the husband to serve as trustee of the wife’s shares as they vest. Dejesus appealed, arguing that his interest in the stock plans would not vest until several years after the commencement of the matrimonial action and, therefore, should not be considered marital property. Dejesus argued that the marital portion of the stock plans should be determined using a time rule fraction similar to that used in the context of pension rights in Majauskas v. Majauskas (61 NY2d 481). Applying the Majauskas formula, the portion of the stock plans constituting marital property would be the ratio of the time from the grant date of the stock plans until the commencement date of the divorce over the time from the grant date until the interest in the stock vests. However, the appellate division affirmed the trial court’s decision, holding that “both plans constituted deferred compensation for employment during the marriage and are entirely marital property.” Because the initial determination of whether a particular asset is marital or separate property is a question of law, the court of appeals granted leave to appeal.

Court of Appeals Decision

The court of appeals noted that this was the first time it had been called on “to determine the manner in which stock plans are to be distributed in a matrimonial action.” Therefore, the court looked to the approaches used in other states and recognized that the considerations and disputes are “quite similar.” The court of appeals found that the Supreme Court of Colorado in In re Marriage of Miller (915 P2d 1314 [Colo.]) adopted a multitiered method to determine how much of a stock plan was marital property. The Miller court held that, to the extent a stock plan is granted for past services, it is wholly marital property. However, a stock option granted in consideration of future services does not constitute marital property until the employee has performed those future services.

Accepting the Miller-type analysis, the New York Court of Appeals held that a stock plan that is compensation for past services rendered during the marriage and up to the time of the grant is marital property. In addition, an incentive stock plan can still be marital property if the marriage is in existence between the time of the grant and the time the plan vests.

The court of appeals found that the trial judge must first determine to what extent the stock plans were granted to the employee as compensation for past services or as incentive for future services, with relevant factors including whether the stock plans were offered as a bonus or as an alternative to fixed salary, whether the value or quantity of the employee’s shares was tied to future performance, and whether the plan was being used to attract key personnel from other companies.

A time rule fraction is applied to the portion of the stock plan found to be compensation for past services, to factor out any value traceable to the period prior to the marriage (see the Sidebar). The time rule fraction is the later of time from the employment date or marriage date until the grant date, divided by the employment date until the grant date.

A second time rule fraction should be applied to the portion of the stock plan found to be an incentive, to determine the marital portion to reflect the growth from the grant date until the matrimonial action was commenced: the grant date until the date of action, divided by the grant date until the stock plan matures.

Accordingly, the order of the appellate division was reversed and the case was remanded to the trial court to consider which portion of the plan was a reward for past services and which was a financial incentive.


Editor:
Thomas W. Morris

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