Is it possible to transfer stock options to another person in a divorce?
November 13, 2000
Subject: Transfer of Non-qualified Stock Options
Date: Wed, 8 Nov 2000
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?
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.