In a Washington divorce, the court must characterize the assets as separate or community property. While categorizing some types of property are fairly straightforward, others can be more complicated. Employee stock options, for example, are characterized based on when they were acquired. The court must look not only at when the stock options were granted, but also when they vest and what they were intended to compensate.
If the stock options are vested, they are acquired when granted. However, the court must apply the “time rule” to unvested stock options. The time rule is a formula that allocates the stock options according to the services performed before and after separation. The court must first determine if the employee received the stock options as compensation for past, present, or future services. Unvested stock options granted for present services during the marriage while the spouses are living together are acquired when they are granted. If the unvested stock options compensate for future services, they are acquired as they vest. Once it makes this determination, the court then must apply the time rule to the first stock option to vest after the separation date.
In a recent case, the wife challenged the characterization of the husband’s employee stock awards as separate property and the husband challenged the split distribution of future stock awards. The couple married in 1994. They moved to Seattle in 2013 for the husband’s job. At the time of the trial, he was earning $185,000 in base salary, plus variable annual bonuses.