Divorce Financial Planning: Concentrated Stock Holdings During Divorce

financial planning, CDFA

Your Investments

We have many clients with significant wealth tied up in the stock of their employers. During Divorce Financial Planning it may become necessary to create liquidity to pay fees, facilitate an equalization payment or create diversification where there previously was none.

These stock holdings are through vehicles such as Employee Stock Purchase Plans, Stock Options and Restricted Stock. They may be vested, unvested or co-mingled, meaning they have different liquidity constraints. Each vehicle also has a different tax consequence at sale. Here is a quick review of some Divorce Financial Planning considerations to consider when seeking liquidity and diversification during during divorce proceedings.

Stock Holdings

For stock held outright we look at tax basis for guidance in our divorce financial planning. Shares with a low tax basis can be sold today to lock in tax rates and later repurchased if the client wishes to continue to hold the stock.

Restricted Stock

Restricted stock generally releases or distributes into a common brokerage account at vesting so it would be treated as normal stock holdings with divorce financial planning decisions based upon review of tax basis. The tax basis is based upon the stock price on the day of vesting and distribution.

Employee Stock Purchase Plans

Stock held in an Employee Stock Purchase plan has a complicated tax picture. The discount, typically 15%, given to the employee on the initial purchase price is taxed at ordinary income tax rates. The difference between the fair market value at purchase and the fair market value at sale is taxable at capital gains rates. ESPP assets often have low tax basis because employees buy and hold the stock  so this may be the first place to look for harvesting gains and resetting basis during your divorce financial planning.

Stock Options

Non-Qualified stock options carry a more complicated set of tax implications and divorce financial planning considerations. Options are taxed as ordinary income for the difference between the strike price and the price at exercise. Options can be exercised today in a same day exercise and sale transaction to lock in tax rates. If you wished to hold the stock you could still exercise the options and lock in the ordinary income tax rates for 2012 but you would have to come up with cash from another source to fund the option exercise. Stock options also become a complicated logistics issue post divorce as the non-employee spouse may not be able to hold the options. For this reason alone it is worth considering liquidation during your divorce financial planning.

Wellspring Divorce Advisors builds long term distribution schedules and detailed analysis of current versus future values including opportunity cost and present value of money to help clients decide how to manage concentrated stock positions during and immediately after divorce proceedings.


wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.