A stock option that doesn’t vest until next year may still be partially owned by your spouse. This depends on when the earnings were made. If any of these earnings occurred during the marriage, the community may have a claim to the option.

Options Earned During Marriage Are Community Property

Under California Family Code section 760, property acquired by a spouse during marriage while living in California is considered community property. Stock options granted to employees, whether vested or unvested, are considered contract rights, and Family Code Section 2550 requires that community property be divided equally.

Separation changes the situation. The earnings and assets of a spouse after the separation date become that person’s separate property. Timing plays a significant role in determining the outcome:

• Options granted and vested prior to the separation are typically considered community property in its entirety.
• Options awarded before the separation but vested after it can be more complicated, as they may be split between community and separate assets.
• Options received after the separation usually belong solely to the employee spouse (unless there was some partial earning before the separation).

The Time Rule Decides How Much Is Shared

For options that straddle the separation date, California courts usually apply a “time rule.” This is a fraction. The court compares the time worked towards an option during marriage with the total time needed to earn it.

Two versions dominate. In the case of In re Marriage of Hug, the court measured from the employee’s first day on the job to the date when each option became exercisable for the first time. The options helped recruit him. Two years later, in the case of Nelson, a formula was approved that starts the clock from the grant date, since those options were mainly intended to reward future work.

Neither formula is mandatory. Hughes made it clear that trial judges have broad discretion and that no single rule fits every case. Why did the employer grant options? The answer could change the formula. Restricted stock units (RSUs) often receive a similar analysis, although the vesting terms in the grant agreement still determine the details.

Three Common Ways to Divide the Options

Knowing the community property share is only the beginning of the process. In most cases, one of the following approaches is used:

• Deferred division: The employee’s spouse keeps the options and holds the other spouse’s share in trust. They exercise the options when instructed and pass along the net proceeds to the other spouse.
• Buyout or offset: The options are valued and the other spouse receives other assets of equal value.
• Transfer in kind, if the company plan allows it. However, many plans do not allow this option.

A buyout gives both spouses a clean break. Deferred division avoids guessing at a value that may swing wildly before options can be exercised.

Taxes Can Change What Each Spouse Actually Receives

Under IRS Revenue Ruling 2002-22, the transfer of nonqualified stock options to a former spouse as incident to divorce is not a taxable event for the employee. The spouse who receives these options reports the income when they are exercised.

Incentive stock options (ISOs) are more complicated. Transferring them to a spouse usually strips them of their favorable tax status, and some plans prohibit the transfer outright. Your agreement should specify who pays taxes on what and when.

The 2026 Joint Petition Doesn’t Skip Disclosure

Since January 1, 2026, spouses who agree on every issue can start their case together with a joint petition for divorce. It works best for couples who have already settled their equity compensation. If you can’t agree on everything, the court’s own guidance says to file for a regular divorce.

The joint petition changes the procedure, not the property law. Both spouses continue to exchange full financial disclosures and every grant, vesting schedule, and unexercised option remains with them. Leaving options on invites a challenge to the judgment later.

Protect Your Share Before the Options Vest

Stock options reward patience, but a divorce rarely waits for the vesting date. The formula and method of division used can decide how much equity your family keeps. Gather your grant agreements, planning documents, and vesting schedules now before anyone exercises an option or allows one to lapse.

At Roberts & Zatlin, we can review those documents, identify which options belong to the community, and push for a division that will hold up at tax time. Contact us to schedule a free consultation about your stock options.