Incentive Stock Options and Non-Qualified Stock Options are Considered Part of Parent’s Total Compensation Package for Support Determination Purposes

After a divorce proceeding, mother and father shared joint legal child custody of their two children, Jessie John and Dustin Nelson. Both children primarily resided with mother, who had been a homemaker throughout the marriage. Mother’s reported monthly interest income amounted to  $1,882 and her reported expenses were $6,500. Mother’s divorce attorney contended the monthly expenses did not reflect the marital standard of living and she had to sell some stocks to generate sufficient funds for expenses.

Father’s annual salary was $110,425 at the time of separation and he received yearly stock options for Qualcomm, the company he worked for. After separation father was to pay mother $1,143 in spousal support and $2,166 in child support. Mother’s divorce attorney subsequently filed a request to modify child and spousal support. The divorce court ordered father to pay $2,000 per month in spousal support and $2,806 in child support. The court explained without awarding child and spousal support from future stock options the monthly amount didn’t adequately meet the former spouse’s standard of living. Further, the divorce court concluded that incentive stock options and nonqualified stock options were part of father’s total compensation package and was to be considered in making support determinations. The divorce court ordered father to transfer to mother 40% of beneficial ownership of any future Qualcomm stock options until both children became 18, upon which the 40% would reduce to 25%. Father’s divorce attorney appealed.

Upon appeal, father’s divorce attorney argued that the divorce court erred by awarding mother a percentage of his undetermined future Qualcomm stock option income as additional spousal and child support. In addressing spousal support, the appeals court explained that there was sufficient evidence of mother’s financial condition to justify an increase in support, without such increase mother would be unable to maintain the marital standard of living. However, the Court agreed with father’s divorce lawyer and found that the drastic increase of Qualcomm’s stock far exceeded the parties’ standard of living. Accordingly, the appeals court reversed the order, requiring father to give mother 40% of Qualcomm stock and instructed the divorce court to determine a just and equitable support order. The Court stated it would be appropriate to order a percentage support award based on father’s exercised option income provided the divorce court sets a maximum amount equal to the marital standard of living at the time of the separation.

Further, father’s divorce attorney contended that the increase in child support was not evidenced by the child’s needs and the divorce court’s order departed from the standard guidelines. The Court determined that father’s stock options amounted to substantial income in addition to his salary and bonuses and that the stock options were to be used in calculating the child support payments. The appeals court agreed with father’s divorce attorney and held that because father’s option income represents an extremely high dollar amount, due to the increase in Qualcomm’s stock value, applying the guideline formula would be inappropriate unless the dollar amount awarded ultimately did not exceed the cost of child’s needs. Thus, the Court reversed the divorce court’s order to award 15% or father’s option income as child support.

In re Marriage of Kerr (1999) 77 Cal.App.4th 87