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Careful consideration necessary when property awards involve stocks

Charlotte Divorce Attorney Matthew R. Arnold of Arnold & Smith, PLLC answers the question ” Are overtime, bonuses, and commissions included in calculating child support?”

 

Contested divorces, in and of themselves, can be taxing on the hearts of spouses, but nothing seems to tax the minds of parties to a divorce action more than analyzing the potential tax implications of a divorce property settlement.

Bar Chart Mecklenburg Family Law Lawyer North Carolina Divorce AttorneyUnderstanding the tax consequences of property transfers in a divorce case is essential to protecting the rights of the parties to the divorce. One area of confusion is the tax treatment of stock options awarded to a spouse as a part of a property settlement or decree.

A husband or wife may have been given a stock option as a part of a compensation package provided by an employer. If the stock option was given to the husband by his employer, but the wife is awarded the stock option in equitable distribution, does the wife have to pay taxes on the transfer?

To understand exactly how much money is at stake, it is first necessary to understand what stock options are and why they are valuable. Stocks are documents that prove a stockholder owns some interest in a company. A stockholder purchases shares from a company; if the company’s value increases, the stockholder can sell his or her share and realize a gain. The gain is taxed. Figuring the amount of this taxable gain can be complicated, and it is important to consult with an experienced divorce attorney or tax professional when assessing tax liabilities in the context of a divorce property settlement.

Back to the hypothetical couple: husband was given a stock option but has not exercised it. A judge awards the wife the stock option in the divorce property settlement. Is this award a “transfer” for tax purposes that renders the wife liable for payment of a tax?

The short answer is No. According to Market Watch, the Internal Revenue Service treats transfers of stock options as a part of a divorce property settlement as gifts between spouses. That means that the transferee—the spouse who is awarded the stock option as a part of a divorce property settlement—does not have to pay income taxes on the award and also does not have to pay a gift tax. Instead, the transferee-spouse “stands in the shoes” of the spouse who was given the stock option by his or her employer for tax purposes, and the tax basis of the spouse given the stock option is carried forward to the point at which the transferee spouse sells or liquidates the asset. The carrying forward of this basis can result in significant tax savings for the transferee-spouse.

One important exception to this general treatment of stock options in divorce property settlement awards applies where the spouse who is awarded the stock option is not a citizen of the United States. An award of a stock option to a nonresident alien spouse is considered a taxable transaction, and the transferee-spouse must pay taxes on the stock-option award if a gain is realized.

If you find yourself facing a complicated family law matter, it is best to consult with an experienced family-law attorney in Charlotte, North Carolina who can help guide you through the often confusing process of divorce. Please contact the experienced family-law attorneys at Arnold & Smith, PLLC today at (704) 370-2828 or find additional resources here.

 

 

About the Author

ARNOLD & SMITH LAWMatthew Arnold is a Managing Member of Arnold & Smith, PLLC, where he focuses on the areas of family law, divorce, child custody, child support, alimony and equitable distribution.

Mr. Arnold was raised in Charlotte, where he graduated from Providence Senior High School. He attended Belmont Abbey College, where he graduated cum laude, before attending law school at the University of North Carolina at Chapel Hill on a full academic scholarship.

A board-certified specialist in the practice of Family Law, Mr. Arnold is admitted to practice in all state courts in North Carolina, in the United States Federal Court for the Western District of North Carolina, in the North Carolina Court of Appeals and Supreme Court, and in the Fourth Circuit United States Court of Appeals in Richmond, Virginia.

In his free time, Mr. Arnold enjoys golfing and spending time with his wife and three children.

 

 

Sources:

http://www.marketwatch.com/story/after-divorce-what-happens-to-your-employer-stock-options-2015-04-21?page=2

http://www.forbes.com/sites/jefflanders/2014/03/19/dividing-stock-options-and-restricted-stock-in-divorce/

http://www.irs.gov/taxtopics/tc409.html

http://www.investopedia.com/ask/answers/05/costbasis.asp

 

 

Image Credit

“Forex 01” by Allan Ajifo – https://www.flickr.com/photos/125992663@N02/14597682251/. Licensed under CC BY 2.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Forex_01.png#/media/File:Forex_01.png

 

 

See Our Related Video from our YouTube channel:

https://www.youtube.com/user/ArnoldSmithPLLC/videos

 

 

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