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Subject:   Transfer of Non-qualified Stock Options
Date:   Wed, 8 Nov 2000
From:   Anonymous

Is it possible to transfer non-qualified stock options to another person? Is it possible to transfer ISO stock options to another person?

Does a divorce decree warrant an ability to transfer either of these stock options if they are not normally transferable?

Answer

Date:   Mon, 13 Nov 2000

In order to determine if a non-qualified option may be transferred to another person, you need to look at the terms of the option. Some are transferable.

By definition, an ISO may not be held by a non-employee except for a transfer by death. If the option is transferred to someone else, it becomes a non-qualified option.

If an ISO is exercised, the shares may be transferred to a former spouse relating to a divorce. The transfer of shares is not a "disqualifying disposition." (IRC Section 424(c)(4).) However, there may be a problem using the AMT credit, resulting in a double tax. It may be better to set up a "constructive trust" arrangement so the credit can be applied when the shares are sold, and the net proceeds transferred to the ex-spouse when the shares are sold.

The IRS recently issued Letter Ruling 200005006, indicating that a transfer of non-qualified options to a former spouse is a taxable transaction, resulting in ordinary compensation income to the transferor spouse.

Be sure to work with a good lawyer in setting up any divorce settlement.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.