Stock and equity awards, such as options, restricted stock, restricted stock units, phantom stock and stock appreciation rights, are a form of deferred compensation known as “executive compensation.” The purpose of executive compensation is to compensate executives, highly compensated directors and employees: 1) to defer tax liability, and 2) to provide an equity stake or a link to stock performance in the company. This is achieved through various compensation mechanisms, each with unique structures, and can include bonus plans, incentive plans, omnibus stock plans, top hat plans, as well as employment and severance agreements. In Colorado, vested stock rights acquired during the marriage will be marital property subject to division in the divorce. Unvested stock rights are handled differently in Colorado property divisions depending on whether they are options or restricted stock.
Unvested Restricted Stock — Marital Property Where There Are Sufficient Signs Of Ownership
Restricted stock is awarded outright to the recipient subject to certain restrictions until the stock vests. The most common restriction is that the stock can’t be sold until vesting. In Colorado, unvested restricted stock awarded during the marriage that carries both associated dividend and voting rights will generally be considered marital property to be divided in the divorce. If the restricted stock carries with it only one of the characteristics of ownership (voting or dividends, but not both) Colorado law is unclear. Presumably, the existence of one characteristic of ownership may still be sufficient to consider the restricted stock marital property, especially where the terms of the award agreement make clear that the company cannot repudiate the employee spouse's right to retain the stock. Even where there are no voting or dividend rights, unvested restricted stock may still be considered marital property where the terms of the plan or award agreement make clear that the employee spouse has an enforceable right to receive the restricted stock if terminated prior to the end of the vesting period as described below with respect to options.
Be aware that restricted stock is not the same as restricted stock units. Restricted stock units are usually a contract for the company to give the employee spouse the value of the stock, or the increase in the value of the stock, in the future. The units represent the value of the employee's interest in the stock in the future, but the stock does not actually exist in the hands of the employee and the employee receives no benefit until the conditions for vesting have been met. As a result, restricted stock units are, like phantom stock rights and stock appreciation rights, more akin to options than to restricted stock and should be treated similarly in divorce in Colorado.
Unvested Options -- Marital Property To The Extent There Is A Presently Enforceable Right Under The Contract
A stock option is a contractual right to purchase stock during a specified period for a predetermined price. The main difference between stock options and restricted stock is that options provide an employee the right to purchase stock at a predetermined price upon vesting, while restricted stock is an outright grant of stock that can't be transferred until vesting occurs. Stock options are often awarded subject to a vesting schedule. To be vested and able to exercise the option, the employee must meet certain criteria such as continued employment or meeting performance goals. Vesting is not determinative in ascertaining whether unvested stock options constitute marital property in Colorado. Instead, unvested stock options will be considered property only when the employee has an enforceable right to the options under the terms of the plan, award agreement, and any other documents making up the contract granting the options. Issues such as whether the employee may still receive all, or a pro-rated share, of the options if he or she terminates service with the company prior to the end of the vesting period can inform the question of whether there is a legally enforceable right to the options prior to vesting. In Colorado, unvested options are marital property to the extent that the services required to earn the options have already been performed, such as where the options were granted as a signing bonus, as a reward for good work on a prior project. Where options were granted for multiple reasons (past and future services), where the terms of the contract are unclear as to whether the award was for past or future services, or even where the contract is clear that the purpose of the award is to reward future services, the terms of the plan and the award agreement may still provide enough information to determine there is a legally enforceable right to receive a portion of the options because some of the services required to earn the options have already been performed.
Transfer Versus Constructive Trust
Sometimes the terms of the award or the requirements of the Internal Revenue Code render stock rights nontransferable. In that case, Colorado courts may impose a constructive trust requiring the employee-spouse to hold the stock rights awarded to the other spouse in the divorce as a fiduciary until such time as the restrictions lapse or the options are exercised.
Stock Rights Can Be Both Income And Property
Colorado law treats the income from options, restricted stock, restricted stock units, SARs and phantom stock as income for calculating both child support and maintenance (alimony). That said, stock rights that have been divided as marital property in the divorce should not be counted again as income for support purposes. Stock rights that are not divided and those awarded in the future will be included in income.
The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.
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