Divorce and Stocks

Do I need a financial specialist as well as a lawyer for my divorce?

April 19, 2019 By CDSOC

By Cathleen Collinsworth, CDFA®, MAFF®
www.cccfda.com
949.262.3692

Do I need a financial specialist as well as a lawyer for my divorce? Won’t I be paying twice the money for two professionals to be doing the same work? As in all questions relating to divorce, the answer is, “It depends.” If the marital estate consists of assets such as a residence, retirement accounts, investments, and or credit card debts, you should consider hiring someone to assist you in fully understanding all the financial issues relating to the marital estate.

Misinformation and misconceptions about the divorce process can be detrimental. Many have false expectations that they will be able to secure a divorce settlement allowing them to continue with their accustomed style of living. Financial divorce analysis helps to ensure a good, stable economic future and prevents long-term regret with financial decisions made during the divorce process.

The financial work provided by a lawyer is not the same as that provided by a trained financial professional specializing in the divorce process. In addition, being a CPA or a CFP does not mean that individual has specific training in family law financial matters.

As you go through the divorce process, finding the right professional to help you can become challenging. Do your homework.

Find a financial analyst who has experience in family law.
Find someone who knows that there can be significant tax implications when the parties divorce.

A Certified Divorce Financial Analyst (CDFA®) is someone trained in finances who has also taken financial courses specifically designed for the knowledge relating to divorcing couples.

Remember Assets Are Not Equal

Example 1:

Swapping a $50,000 interest in a joint savings account is not the same as receiving a $50,000 interest in a 401(k) plan.

There are no tax consequences to withdrawing the money from the savings account.

There will be current tax consequences as a result of withdrawing money from the 401(k) plan: You will pay ordinary income taxes on the amount withdrawn and, depending on the circumstances, you can pay a combined 12% penalty.

Example 2:

Swapping the family residence with $100,000 of equity with a stock account that currently has a $100,000 capital gain is not equal. If the family residence is sold there could be no capital gains tax owed because there is a $250,000 ($500,000 if married) capital gain exclusion relating to the sale of the family residence.

Stock with a cost of $100,000 is sold for $200,000. Gain of $100,000 could be taxed as high as 23.8% for the Federal Government or $23,800 thus leaving cash available of $76,200.

As you navigate through the divorce process you can make better decisions when you are fully informed of the impact of your financial decisions going forward. The decisions you make now can impact your future financial status.

As you can see, not hiring the right financial professional can be costly. Don’t roll the dice and hope for a good outcome.

Please do not hesitate to call if you have further questions, comments or would like additional information.

© 2018 Cathleen Collinsworth, CDFA®, MAFF® Cathleen Collinsworth is a CDFA®, Certified Divorce Financial Analyst, and a MAFF®, Master Analyst in Financial Forensics, who has been practicing as a sole practitioner in Irvine since 2000. She has been retained as a forensic accountant and expert witness to provide services in family law for 20+ years. As a member of Collaborative Divorce Solutions of Orange County (CDSOC) since 2007 she has provided services as a Neutral Financial Specialist and team facilitator. Cathleen has served on the Board of Directors of CDSOC and served as the President for 2016-2017. She has extensive training in mediation and the interdisciplinary team model of collaborative practice and frequently mentors’ collaborative practitioners. She has authored articles, presented seminars, been a guest speaker and has prepared instructional videos in the field of finances and family law during the last 20 years. She currently serves on the Collaborative Divorce Education Institute’s Leadership and Training team and is a frequent trainer at the annual conferences of Collaborative Practice California, the International Academy of Collaborative Professionals, the Association of Family and Conciliation Courts, and other professional conferences throughout California. In 2015 Collaborative Practice California (CP Cal) awarded Cathleen the Eureka Award, which recognizes those who have made significant contributions and demonstrated an abiding dedication to establishing and sustaining Collaborative Practice in California. Cathleen also serves as a CP Cal Delegate and is a member of the International Academy of Collaborative Professionals (IACP). A detailed list of her training can be found at https://www.collaborativepractice.com/members/2328. For additional information, please visit her website at www.cccdfa.com.

Dividing Stock Options and Restricted Stock In Divorce

September 1, 2016 By CDSOC

by Thea Glazer, CFP®, CDFA™, MS Accounting
Glazer Financial Advisors, Laguna Hills, California

Stock options and restricted stock may be part of the marital estate. And they are some of the more complex assets. This brief overview provides a basic understanding of the factors you need to take into consideration. It does not go into all the many tax and technical issues that are aspects of equity compensation. Seeking professional guidance for your specific circumstances is always a good idea.

Many companies grant their employees equity compensation in addition to their salaries, commissions and cash bonuses. Equity compensation is non-cash compensation representing a form of ownership interest in a company. Among the most common are employee stock options and restricted stock or restricted stock units. In divorce, stock options and restricted stock are property to be divided. The employee’s separate shares are often also considered as income in the calculations of support.

Employee Stock Options (ESOs)

An employee stock option is the right given by an employee to purchase a specified number of shares of the employer’s stock for a specified price and for a specified time. There are two types of ESOs, Incentive Stock Options (ISOs) and Nonqualified Stock Options (NQs). The primary difference is that ISOs have an advantageous tax treatment explained below.

Stock options have a Grant Date, Exercise Price, Vesting Schedule and Expiration date. Example: Company ABC grants John Smith 3,000 non-qualified options on January 4, 2015 at a grant price of $10.50, a four-year annual vesting schedule and an expiration date of January 4, 2025. That means that John can exercise (buy) the 750 shares of stock annually on January 4 from 2016 through 2019. He does not have to exercise any shares until January 3, 2025. If he doesn’t exercise by the date of expiration, they will expire and be worthless.

Taxation of Stock Options Nonqualified stock options are taxed at the time of exercise as ordinary income. The amount taxed is the difference between the grant price and the fair market price. Most companies sell enough shares to cover the withholding tax and release the net shares or proceeds if the shares were simultaneously sold. If the shares are held once exercised and sold later, there may be capital gains tax as well. Unless shares are about to expire, most people exercise and sell simultaneously.

Incentive stock options are not taxed when they are exercised. If the shares are held for at least one year from exercise and two years from grant date, the gain is taxed at the advantageous long term capital gains rate.

Restricted Stock (RS) and Restricted Stock Units (RSUs)

Unlike stock options, restricted stock and restricted stock units are actual stock. There is usually no purchase price and, if there is, it is very, very nominal (one cent). Holders of restricted stock have voting rights while holders of restricted stock units do not. Restricted stock units cannot be “underwater” which happens to options when the grant price exceeds the fair market price so they are much less risky. Grants of restricted stock usually have about one-third as many shares as do options. Restricted stock grants have a grant date and vesting schedule. There is no expiration date and usually no grant price.

Taxation of Restricted Stock

Once a share of restricted stock vests, it is released. Upon release, the fair market value less any purchase price is taxed as ordinary income. Most companies sell enough shares to cover the withholding taxes and release the net shares. There is no decision making needed by the employee like there is regarding when to exercise options. Once restricted stock vests, it is automatically released. Many employees continue to hold the net shares until a time they need the cash, feel the stock has reached a good selling price or want to diversify their portfolios.

Transferability of Stock Options and Restricted Stock

Some plans allow NQs to be transferred to the former spouse of the employee, but the majority do not. It is very rare to see ISOs transferable. If they are transferred, they may lose their status as ISOs and fall under the tax rules for NQs.

RS and RSUs are not transferrable.

For non-transferable shares of options or restricted stock, the employee holds the shares on behalf of the non-employee spouse and exercises on his/her behalf or transfers released shares. There are IRS acceptable ways to allocate the taxation so the non-employee spouse is taxed at his/her rate rather than that of the employee.

Division of Equity Compensation in Divorce

Both stock options and restricted stock shares are divided by formulas. The most commonly used ones are Nelson and Hug.

The Nelson formula is: Date of grant to date of separation ÷

Date of grant to date of exercise or release

The Hug formula is: Date of hire to date of separation ÷

Date of hire to date of exercise or release

The reason the grants were awarded determines which formula is applicable.

Valuation of Stock Options and Restricted Stock

It is rare to value the options rather than to divide the shares. That is because the value is constantly changing so it is imprecise at best. In order to correctly value the options, the following factors are in the variables of a complex formula, the Black-Scholes formula that is used in valuing stock options:

Grant price
Grant date
Date of expiration
Vesting schedule
Current stock price
Volatility of the stock price

Sometimes valuing the options is the only way to effectuate the property division by offsetting another asset. However, dividing the shares divides both the risk and reward to both spouses. I believe it is preferable when possible.

Collaborative Divorce Offers Flexibility

In Collaborative or mediated divorce cases, there is far more flexibility in dividing assets. Unequal divisions are also acceptable if the parties agree and have reasons to do so. In court, such flexibility is not nearly as possible. This is another great reason to consider alternative dispute resolution such as Collaborative Divorce to allow you to make the best decision possible for your circumstances, rather than a decision forced upon you by a judge.

Community Property and Separate Property: What’s the Difference?

July 19, 2016 By CDSOC

by Sara E. Milburn, Attorney at Law
Milburn Family Law, Laguna Beach, California

Many of my clients come into my office with the mistaken belief that after a long marriage, everything they own together is community property, and they are going to leave the marriage with one half of this property. Sometimes it is a shock for them to learn that is not necessarily the case.

Property issues in a divorce can be very complex. These are the basics to help you start working through your decision-making process.

Separate Property

In California, separate property is defined by Family Code 770. Separate property of a married person includes all of the following:

All property owned by the person before the marriage,
All gifts or inheritances received.
The rents and profits the separate property earns.

Where this can become confusing is when the spouse who owns the separate property uses his time and talent (called “community effort”) to cause an increase to his or her own separate property. This must be more than a diminutive amount of time or effort. The court has wide discretion here. If the separate property was a stock account and the spouse was a day trader then there would be considerable community effort and the increase in value of the stock might be part community property. If it was a stock account that was managed by a financial advisor with only minimal decisions made by the spouse that would probably not give the community any interest in the increase in value of the stock account.

Community Property

Except as otherwise provided by California law, community property is considered all property acquired by a married person during the marriage. The exception is property specifically identified up front as separate property. Examples include property owned before marriage, gifts or inheritances as long as the source of funds to acquire the asset was community funds (i.e., earnings by either or both spouses during the marriage).

Co-Mingled Property

If separate property and community property in the way of money or investments are both deposited into the same account or asset owned jointly by the spouses, it may create issues of tracing. A forensic accountant with specific expertise will need to become involved.

Separate Property: Stock Accounts or Bank Accounts

If one spouse owns stock in a public company, or has a bank account that remains in his or her name as a separate account, and no community property earnings are placed into their separate account, then no matter how much the account balance grows through earnings or interest, the other spouse will have no interest in that investment.

Separate Home Before Marriage

With people getting married at older ages, and with numerous second (and third and more) marriages, this is a common situation. One of the spouses may own a home in their own name at the start of the marriage. They may never add their spouse’s name on the title to the home. In this situation, the home remains the separate property of the spouse who owned the home prior to the marriage, as his or her sole and separate property. This is true even if the couple lived in the home 30 years during their marriage.

The community might receive a portion of the equity if the mortgage was paid down during the marriage. There is a formula that is used (called “Moore-Marsden”) but the house remains the separate property of the spouse who owned the home before marriage. If the spouse who owned the home prior to marriage does add his or her spouse’s name to the title on the property, the non-owner spouse would be entitled to half of the appreciation in value of the home that took place AFTER his or her name was added to the title.

Separate Home Purchased During Marriage

It is possible for one spouse to use their separate money to buy a house by themselves and for themselves alone during the marriage, and take title in their own name as their separate property. If there is a mortgage loan on the property-it may create a community interest in the separate property home due to the debt obligation.

Using Separate Property As a Down Payment on a Community Property Home Purchase

If an individual sells his or her separate property home purchased prior to the marriage, and uses the proceeds to help buy a new home with both spouses’ names on the title as the legal owners, the spouse who owned the separate property before marriage can still set aside the amount invested as a down payment as his or her separate property. There is an absolute right to reimbursement of separate property. See California Family Code 2640.

This is an example of how it might work. Wife “Melissa” owned a townhouse before her marriage to “Mario.” Melissa sells the townhome for $300,000. She and Mario then buy a new single family home for $700,000. She uses the $300,000 from the townhome as the down payment. Then Melissa and Mario take out a mortgage loan for the remaining $400.000. Ten years later, Melissa and Mario get divorced. They sell the house for $850,000. After paying off the loans and fees, Melissa and Mario have $620,000. Melissa receives her original $300,000 down payment off the top. Then Melissa and Mario split the remaining $320,000, receiving $160,000 each. Melissa receives $460,000, and Mario receives $160,000.

Separate Property: Business

When a business owned by one of the spouses grows in value during the marriage there are two conflicting cases in the law which define how to apportion the profits.

Under the Pereira case definition, “a fair return” on the separate property investment is given and the balance of the increased value is allocated to the Community Property because the time and talent of the spouse is Community Property.

Under the Van Camp case definition, the court would determine the reasonable value of the community’s service, and allocate that amount to the Community Property and allocate the balance to the Separate Property.

If this seems confusing or complicated, you are right. It can be very complicated. This is why it’s essential to rely on trustworthy advice from legal and financial advisors who have expertise in property division as the result of a divorce to help you understand your options and your rights under the law. It is worth investing in this guidance to help you avoid costly mistakes due to unfamiliarity with your best options.