How are stock options and deferred compensation divided in Washington divorces?

Understanding the Division of Stock Options and Deferred Compensation in Washington State Divorces

When a marriage ends in Washington State, the division of assets can be a complex and contentious issue. Among the more intricate assets to divide are stock options and deferred compensation. These forms of compensation are often tied to the performance and longevity of employment, making them unique compared to other financial assets.

Division of Assets in Washington Divorces

In Washington, which is a community property state, all property and debts acquired during the marriage are considered owned equally by both spouses. When divorcing, these assets and debts must be divided equitably. However, 'equitable' does not always mean 'equal.' The courts strive to reach a fair division based on several factors including the duration of the marriage, the nature of the property, and each spouse's financial circumstances.

Stock Options in Divorce

Stock options are rights given to an employee to purchase company stock at a predetermined price. They are often used as a form of long-term compensation or incentive. In divorce proceedings, determining whether stock options are community or separate property is essential.

Options granted during the marriage and vested before separation are typically considered community property. However, if they were granted or vested after separation, they may be deemed separate property. The situation becomes more complex with unvested stock options granted during the marriage but vested after separation. In such cases, courts may apply a time rule formula to determine what portion constitutes community property.

Deferred Compensation in Divorce

Deferred compensation plans like pensions, retirement accounts, and 401(k)s are also subject to division during divorce proceedings. These plans involve income earned during the marriage but received at a future date. The critical factor is whether the deferred compensation was earned during the marriage.

If it was earned while married, it's likely considered community property even if it will be paid out in the future. Courts may use a Qualified Domestic Relations Order (QDRO) to divide these assets equitably among spouses.

Challenges in Valuation

Valuing stock options and deferred compensation can be challenging due to their speculative nature and dependence on future events. It often requires expert financial analysis and sometimes agreement on valuations between parties or determination by the court.

Notable Cases and Examples

An illustrative case is Marriage of Short, where the Washington State Supreme Court dealt with dividing unvested military retirement benefits. In this 1995 case, the court established guidelines for dealing with similar unvested benefits that could apply by analogy to stock options and other forms of deferred compensation.

Negotiating Settlements

Negotiating settlements involving stock options and deferred compensation requires strategic thinking. Spouses might agree on one keeping certain assets while compensating the other with different assets or cash equivalencies.

Conclusion

The division of stock options and deferred compensation in Washington divorces requires careful analysis under state law. Parties must understand how these assets are classified, valued, and divided to reach an equitable settlement or prepare for court determination.