Assume you have a friend going through a divorce in Massachusetts after being married for twenty years. Your friend has stock options accumulated during the last ten years of his marriage, and he tells you he is hoping to keep them out of the property division. For one thing, his stock option plan indicates that the options are non-transferable. For another, his options are not worth very much today, but he anticipates them growing significantly in value after the divorce. Furthermore, one third of the options have not vested yet. Your friend has worked hard at his job, and he tells you that his options are a reward for his hard work. He associates his options with everything he loves about his work and his long-term employer. You listen, but you remember that in your Massachusetts divorce you had stock options too, and they were treated as marital property subject to division, along with the house and the investment accounts. And even those options that would not vest until after divorce were treated that way. Should they have been?

Under Massachusetts divorce law, stock options are, generally speaking, treated as marital property, whether vested or not prior to the divorce. In the key case on this subject, the Massachusetts Supreme Judicial Court stated that although the Massachusetts statute governing property division upon divorce (General Laws c. 208, § 34) "does not expressly mention stock options, the language in the statute that a party's 'estate includes all vested and nonvested benefits, rights and funds' clearly indicates that both vested and unvested stock options may be treated as marital assets." Baccanti v. Morton, 434 Mass. 787, 794-795 (2001). Regarding unvested options, the Baccanti opinion points out that just as unvested retirement benefits are assets that may be treated as part of the marital estate, so unvested stock options are assets that may be treated as part of the marital estate.

The Baccanti opinion recognizes the special nature of stock options -- in particular, the uncertain value of unvested options. The vesting of the options may be contingent on continued employment. Also, the value of the stock when the options vest may be less than the price at which the options can be exercised. But Baccanti makes clear that any uncertainty in value is not an impediment to dividing the property incident to a divorce. In lieu of determining a present value for the options, it is possible for the options to be apportioned between the parties as part of the property division. Then, as the options vest and are exercised, the parties will share the proceeds of a sale of the options, according to the pre-determined apportionment (either 50-50 or according to another specified ratio). This "if and when received" approach is deemed acceptable by the Court in Baccanti. To provide for the possibility that the employee-spouse may choose not to exercise the options when they vest, or may choose not to sell the shares when the non-employee spouse would prefer to do so, the non-employee spouse can be given the power to exercise the options apportioned to him or her by acting through the employee spouse; similarly, the non-employee spouse can be given the power to sell his or her shares through the employee spouse. (If the stock option plan permits the options to be signed over to the non-employee spouse at the time of the divorce, the non-employee spouse can act directly rather than through the employee spouse.) Each party can be given responsibility for the tax consequences resulting from the sale of his or her shares.

With respect to unvested stock options, the above picture is complicated by an additional element discussed in the Baccanti opinion. If the employee spouse can prove that the options were awarded for future service (that is, service to be performed after the marriage ends), and if the employee spouse can further prove that the non-employee spouse "did not contribute to the employee spouse's ability to acquire the unvested options," then a judge may decide, in light of all factors under General Laws c. 208, § 34, that a portion of the unvested options should not be included in the marital estate. The burden of proof is on the employee spouse. If the burden is met, the judge has discretion in determining what portion of the unvested options should be omitted from the property division and what portion should be included in the marital estate; and, with respect to the latter portion, what the appropriate division is. The Baccanti opinion sets out a so-called "time rule" as an "effective and straightforward means" of determining what portion of the unvested options to omit from the marital estate in these cases. Judges have the discretion to modify the Baccanti time rule or to use another approach that achieves an equitable division.

The Baccanti time rule works this way: "The number of unvested shares of stock options is multiplied by a fraction whose numerator represents the length of time that the employee owned the options prior to dissolution of the marriage (i.e., the length of time that the employee owned the options prior to and during the marriage), and whose denominator represents the time between the date the options were issued and the date on which they are scheduled to vest. The resulting product is the number of shares subject to division." This sounds confusing, but when the formula is applied to a set of facts in a particular case, it actually is quite straight forward.

Although the part of the above discussion regarding burden of proof applies only to litigated divorces, consideration of the underlying questions -- namely, why were the unvested options awarded, and what did the non-employee spouse contribute to the acquisition of the options -- may be important in uncontested divorces as well. Mediators and collaborative lawyers should not overlook this part of the Baccanti opinion.

The entire Baccanti analysis, including the time rule, establishes the context for dealing with stock options and divorce in Massachusetts, whether or not the divorce is contested. In cases where the parties are able to cooperate, including mediated divorces, Baccanti provides essential guidance for reaching a fair and reasonable resolution of the stock option problem.

The Baccanti opinion, in footnote number 10, provides the following example of how to apply the time rule: "... we hypothesize that an employee was given one hundred shares of unvested stock options; that they were issued three years before dissolution of the employee's marriage; and that they will vest two years after dissolution of the marriage. The time that the employee owned the options prior to dissolution of the marriage would be three years, and the time between the date the options were issued and the date that they vest would be five years (three years before dissolution plus two years after). The portion of the options that could be included in the marital estate would be three-fifths. The one hundred shares are then multiplied by three-fifths, which equals sixty. Therefore, sixty of the one hundred shares of unvested stock options may be subject to division between the spouses. The judge would then make an assignment of those sixty shares of stock options in accordance with G. L. c. 208, § 34. The remaining forty shares would not be included in the marital estate and thus would belong solely to the employee spouse."

Copyright © 2009 Marion Lee Wasserman. All rights reserved.

The above article is provided for general informational purposes. This article is based on Massachusetts case law and applies to Massachusetts divorces only. Furthermore, it is not intended to apply to any specific facts or circumstances and should not be construed or applied as legal advice or legal opinion or as tax advice or as establishing an attorney-client relationship.