Legal Question in Family Law in California

There is a leading case on this called In re Marriage of Hug (1984) 154 Cal.App.3d 780, which explains that each stock option must be treated on a case by case basis. Some stock options are given to provide incentive for the employee to continue to work with the company. In that case, they are treated as future income. Other stock options are to attract an employee, and are considered deferred compensation for present services. Other stock options are really a bonus for work already performed, and are treated as additional compensation for past services. Depending on the reason, a court could change its characterization of the stock option depending on the reasons behind the stock option, and depending on when the period of marriage was.

In the case I mentioned above, the court did not look at the vesting date. Rather, the court treated the stock options as earned from the time the employee began to work for the company, and applied the "time rule" from calculating community property interests in pension plans to determine the community interest in the stock options. In that situation the numerator is the number of years of marriage, and the denominator is the number of years of employment until the exercise of the option.

If the stock options are community property, or if the community has an interest in them, placing the proceeds in a segregated account does not magically convert them to separate property. One spouse is not allowed to make a gift of community property to himself/ herself.

Roach is right on this one, but misses an additional issue: where the funds came from to exercise the options. That too will affect the character of the property. You can't take separate property options, exercisee them with community funds and have the shares purchased retain their separate property character.