Treatment of Stock Options as Marital Property in Illinois

Although it may seem that stock options are not property in the traditional sense, Illinois courts consistently treat them as marital property. The Illinois Marriage and Dissolution of Marriage Act (IMDMA) states: "all stock options granted to either spouse after the marriage and before a judgment of dissolution of marriage or declaration of invalidity of marriage, whether vested of non-vested or whether their value is ascertainable, are presumed to be marital property." 750 ILCS 5/503(b)(3). The presumption is overcome by showing, as in any other case, that the property was a gift, inheritance, acquired before the marriage, or a variety of other (probably inapplicable) factors listed in 750 ILCS 5/503(a). Id. As such, stock options acquired during the course of the marriage are presumed to be marital property, and are subject to division upon dissolution.

After determining to what extent the stock options are marital property, a court dividing the stock option must undergo a slightly more strenuous task: allocating the proceeds of the marital portion of the stock options if and when they are exercised. 12 Ill. Prac., Fam.L. 750 5/503 (2011 ed.). In addition to the usual factors in 750 ILCS 5/503(d), the court must also consider the following when allocating stock options: i. All circumstances underlying the grant of the stock option including but not limited to whether the grant was for past, present, or future efforts, or any combination thereof; and ii. The length of time from the grant of the option to the time the option is exercisable. 750 ILCS 5/503(b)(3)(i) - (ii).

The difficulty with allocating stock options is that their value is almost always uncertain at the time the court is entering the order. To remedy this, the court takes one of two reserved-jurisdiction approaches: either the court will delay dividing the asset, but order how it will be divided when it is exercised; or the court can determine the method of apportionment when the asset is received. In re Marriage of Peters, 760 N.E.2d 586, 592 (Ill. App. 2d Dist. 2001). Although Peters dealt with stock bonuses, rather than stock options, the court is explicit in stating that stock options are similarly distributed. The Court goes on to say that the first method-determining at the time of dissolution how the asset will be divided-is preferable because then the decree is final. Id.

When determining the allotment of the option, the court has the same broad discretion is has in determining any property division, with the additional factors specific to stock options. See id. Upon appeal, the trial court's decision will only be reversed in the event of abuse of discretion. See id. It is difficult, therefore, to predict exactly the division a court may choose, and the same division is certainly not appropriate in all cases. See id.

Once the stock option has been divided, it is at the sole discretion of the party holding the option if and when to exercise it. See In re Marriage of Frederick, 578 N.E.2d 612, 618 (Ill. App. 2d Dist. 1991). In Frederick, the appellate court upheld the trial court's determination that the husband, who held stock options from his employer, had sole discretion concerning when and whether to exercise his option. Id. Because the option was non-transferable, as are most employee stock options, and because the value was indeterminable at the time of dissolution, the court reasoned that the option remained the husband's separate, non-marital property until such time as it was exercised; only when it is exercised does a stock option have value. See id.; see also In re Marriage of Isaacs, 632 N.E.2d 228, 234 (Ill. App. 1st Dist. 1994). As such, when the wife petitioned the trial court to compel her ex-husband to exercise his option, the trial court refused, and the appellate court confirmed. Frederick, 578 N.E.2d at 618. Therefore, although one spouse may be entitled to a portion of the profits from the exercise of a stock option in her former spouse's name, if her former spouse chooses not to exercise such option, her interest in the option is worthless.
Ultimately, stock options, to the extent that they are marital property, are divided in much the same way as other marital property. Generally, courts will determine at the time of dissolution what portion of profits from the exercise of a stock option will go to each party, and that determination will not be disturbed absent an abuse of discretion. Although courts will allocate future stock option profits, those stock options remain the sole property of the spouse earning them, and become marital property only when they are exercised. The result of this rule, then, is that sometimes, although one spouse may have a sizeable interest in the exercise of a stock option, she is powerless to realize that interest if the option is in her former spouse's name.

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