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.
The wife was a doctoral candidate when the couple married. She finished the coursework, but stopped working toward her doctorate when she became pregnant with their second child. She did not return to her studies. At the time of the divorce, she did not work outside the home. The trial court found she had “significant medical issues” that prevented her from working full time.
The trial court awarded the husband his checking account, car, inheritance, personal property, and future stock of his employer. The wife was awarded the remaining property, including bank and retirement accounts. She was also awarded child support and spousal maintenance. Additionally, the court ordered the husband to pay the wife’s attorney fees from the stock awards he had been awarded by his employer but which had not yet vested.
Many issues were litigated through various motions. Ultimately, both parties appealed. Although many other issues were addressed on appeal, both parties appealed aspects of the stock option distribution. The wife argued, in part, the trial court had mischaracterized the stock options that had already been awarded as the husband’s separate property. There were three stock options awards at issue in the appeal, all of which were partially unvested. There was an “On Hire” award in April 2014, a “FY 14 Annual SA” award in August 2014, and a FY15 Annual SA” award in August 2015. The court noted that the husband would have to remain with his employer for the remaining shares to vest. A percentage vests annually at the end of August.
The trial court had awarded part of the unvested shares to the wife for attorney fees, finding they were the husband’s separate property. The appeals court found, however, the trial court had not conducted the fact-finding analysis necessary to determine what the awards compensated and properly characterize the stock options. The appeals court remanded for the trial court to evaluate the factual circumstances of the awards and apply the time rule if appropriate.
The husband appealed the trial court’s award to the wife of half of any future stock awards. The appeals court noted that RCW 26.09.080 requires the court to consider the nature and extent of separate and community property, the duration of the marriage, and each spouse’s economic circumstances. The court then must make a “just and equitable” distribution of all property, whether community or separate. The trial court has broad discretion in determining a just and equitable distribution, and will be overturned on appeal only if there was a manifest abuse of discretion.
The husband had not shown a manifest abuse of discretion here. The record documented the trial court’s consideration of the relevant factors and circumstances. The appeals court found no abuse of discretion in splitting the future stock awards evenly between the husband and wife.
This case shows that a court must thoroughly review the circumstances surrounding an employee stock option award to properly characterize it. It is not a simple matter of when it was awarded or even when it vests. Furthermore, this case illustrates the trial court’s broad discretion in distributing all the couple’s property fairly and equitably, including the separate property.
If you are facing a divorce, an experienced Washington family law attorney can help you protect your rights through the complexities of property distribution. Call the high-asset divorce attorneys at Blair & Kim, PLLC at (206) 622-6562 to discuss your case.
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