## Facts

- Husband and Wife divorced after a 30-year marriage.
- During the marriage, Husband received multiple grants of employee stock options from his employer.
- When the dissolution petition was served, Husband held both vested and unvested options.
- The parties agreed that (1) options vested before service were community property and (2) options granted after service were Husband’s separate property.
- The dispute concerned options granted during the marriage but unvested (not exercisable) as of service.
- Employer evidence (including testimony from a corporate officer and plan language) indicated the options were not awarded for past performance and were intended to encourage continued employment and future efforts.
- Wife offered expert testimony that the options functioned as compensation for past performance.
- Husband acknowledged the options influenced his decision to remain employed at his then-current compensation.
- The trial court treated the unvested options as community property and awarded Wife one-half, reasoning Husband had not shown they were solely incentives for future services.
- Husband appealed the characterization and division of the unvested options.

## Issues

1. How should unvested employee stock options granted during marriage but unvested at service of a dissolution petition be characterized: community property, separate property, or partly both?
2. What findings and methodology must a trial court use to classify and apportion community and separate interests in such unvested options?

## Decision

- The court of appeals reversed the portion of the decree classifying and dividing the unvested options and remanded.
- The trial court must determine, for each unvested option grant, whether it was intended to compensate past services, incentivize future services, or serve both purposes.
- If the options have mixed purposes, the trial court must allocate the options between community and separate property using an equitable method consistent with the evidentiary findings.
- Because the options characterization could affect related financial determinations, those matters were left open to the extent dependent on the proper options allocation.

## Legal Principles

- Property acquired during marriage is presumptively community property, but the presumption may be overcome by evidence showing the asset represents compensation for post-community (separate) efforts.
- Employee stock options are a form of employment compensation; their characterization depends on the employer’s purpose in granting them.
- Options intended to compensate services performed during the marriage are community property.
- Options intended to reward or secure future services after termination of the community are separate property, in whole or in part.
- When options serve both as a reward for past work and as an incentive to remain employed, the court must apportion community and separate interests rather than classify all options as entirely community or entirely separate.
- Trial courts may use time-based or other equitable allocation approaches to match the community share to the period in which the options were earned for community efforts.

## Conclusion

The appellate court required a purpose-based characterization of unvested marital stock options and rejected automatic treatment of all such options as community property; on remand, the trial court must make specific findings on each grant’s compensatory purpose and apportion any community and separate components accordingly.


Brebaugh v. Deane, 118 P.3d 43 (Ariz. Ct. App. 2005)