Published January 13, 2015
STOCK OPTIONS are often a highly contentious aspect of divorce negotiations. Indeed, finalized divorce settlements have been reopened once one spouse has decided to go after some of the options that he or she wasn't awarded in the original property settlement. And experts still waffle on the best way to divvy up stock options, especially when their precise value can't be determined.
Making the calculations more difficult is the tax treatment of employer-granted stock options. The general rule is that you can make post-divorce tax-free asset transfers between you and your ex as long as they're called for by your divorce property settlement. (See "Divvying Up the Investments.") After such a tax-free transfer, the new owner's tax basis in the asset is the same as the old owner's, and the new owner's holding period includes the old owner's time of ownership.
This general rule also applies to vested employer stock options. It doesn't matter if they were incentive stock options (ISOs) or nonqualified stock options (NQSOs). So there's usually no tax problem if you must give option stock to your ex after the divorce under the terms of your settlement. Your ex -- not you -- will owe the taxes if the options are exercised for a profit.
The Internal Revenue Service says these results apply for both ISOs and NQSOs. It's unclear what happens when unvested stock options are transferred in divorce. (See IRS Revenue Rulings 2002-22 and 2004-60.)
So what should you do? You can try to rig your property settlement so you won't have to transfer any unvested employer stock options to your ex. Instead you can agree to give your ex cash or most other types of assets tax-free.