Recent Developments in Family Law: Stock Options Must Be Considered Income

in Family Law by Stephanie Blum

It is well-established under California family law that stock options granted as part of a parent’s employment compensation constitute “income” under Family Code Section 4058(a) and must be used to calculate support.  Until In re Marriage of Macilwaine, 26 Cal. App. 5th 514 (2018), though, it was unclear when stock options become income for support purposes.  According to Patricia Macilwaine, her ex-husband John Macilwaine’s stock options became income once they vested and restrictions on John’s ability to sell the stock were removed.  According to John, however, stock options were not income until the time of exercise (when he had the option to buy the stock) and sale.

The California Court of Appeal, First Appellate District, Division Two agreed with Patricia.  The Court held that Family Code Section 4058(a)(1) includes all compensation conferred upon and available to a supporting parent as income.  The statute does not exclude as income amounts a parent voluntarily defers or refuses to accept.  Accordingly, once there are no legal restrictions on the stock-holding parent’s ability to exercise stock options and sell the shares, the options must be counted as income under Section 4058(a)(1).  The trial court did not have discretion to exclude from income compensation available to John in the form of stock options.

In addition, the Court found that John’s investment preferences cannot affect what is considered “income” for the purposes of guideline child support, stating: “The purpose of child support… is not to maximize returns on a parent’s long-term investments; it is to provide for the children’s immediate needs based upon the resources that are currently available.”  It was error for the trial court to defer to John’s investment priorities versus his ability to actually pay support.  Furthermore, by focusing on the lifestyle John currently provides to his children and his historical spending on them as opposed to the standard of living attainable with his income and wealth, the trial court used the wrong legal standard in determining the children’s needs per Family Code Section 4057(b)(3).  In short, the children’s current standard of living does not determine their needs under Section 4057(b)(3).  Instead, children are entitled to the standard of living that is attainable by the parent’s income.