Division of Stocks, Options, and RSU

What are RSUs?

Restricted Stock Units (RSUs) are given to employees by the company with a contract that is called a “grant.” The grant specifies all the important details – including the number of RSUs and when they vest. Grants may be given on a recurring schedule (such as yearly), or at certain times (such as a signing bonus.) Similar to options, RSUs vest over time. When RSUs vest, they are converted into company stock.

There is no uniform vesting schedule for grants. For example, 25% of RSUs might vest on each anniversary of the grant, in which case it takes four years for the employee to receive all the stock, with an installment received every year. For another grant, 5% might vest every month, in which case it takes 20 months for the employee to receive all the stock. Not only do vesting schedules differ between companies, but can differ between grants; the schedule must be separately consulted for each individual grant. If an employee terminates employment, the RSUs that did not vest are forfeited.

Stock is subject to income and FICA taxes at market value for the stock as it vests, unless the employee has prepaid tax by making a “§ 83(b) election.”

If the company is publicly traded, stock from RSUs can be sold on the stock market, just as if the employee had purchased that same stock on the market. Many employees sell some or all stock as it vests to receive cash or pay taxes. If the company is privately held, the stock can only be sold as specified in the agreement that governs stock ownership.

When an employee and spouse are getting divorced, publicly traded stock that was acquired from RSUs can easily be transferred between spouses. Such a transfer is not be possible if the company is privately held and its stock is subject to transfer restrictions. No capital gains or losses are incurred at the time of divorce; the basis in the stock (the value at the time of vesting) stays with the stock. Unvested RSUs cannot be transferred between spouses in divorce—but they must be considered in divorce.

Addressing RSUs in Divorce

Once a company has fulfilled its obligation to issue stock, vested RSUs can be disregarded in divorce. What gets considered is the issued stock; if that stock was sold, then the proceeds from the sale of stock can be considered. Unvested RSUs, however, must be considered in divorce.

At a minimum, unvested RSUs must be addressed in the divorce paperwork. Like other contractual rights, RSU grants are considered to be “property” under California law.

Because RSUs cannot be transferred, divorcing spouses may agree to transfer a portion of the stock (or money) as the RSUs vest. Preparing a contract that correctly accomplishes this and addresses the tax consequences requires some sophistication. To understand your particular RSUs, we would need a copy of the grant contract.

From a financial standpoint, unvested RSUs can be considered to be an asset. They can also be considered to be future income. Both are correct, but not at the same time to prevent double-counting. Regardless, any amount used during discussions will likely be inaccurate because (1) future stock prices cannot be predicted, and (2) the employee might not be employed on future vesting dates. Because of these variables, unvested RSUs are perhaps most accurately addressed by treating them in the divorce as fluctuating, with values not determined until vesting.

In some circumstances, for divorce purposes a couple may wish to consider unvested RSUs as property that has a fixed value. Doing so might be beneficial if each spouse has a different ability or willingness to tolerate risk of loss. By using a fixed value, the employee spouse is betting that the future realized value will be equal or higher than the amount used for the divorce settlement. The non-employee spouse will be trading the possibility of a future increased stock price in return for certainty. If the employee spouse can tolerate the risk of loss, and the non-employee spouse cannot, then this trade may be beneficial to both spouses.

How are RSUs Divided?

There are three basic formulas (IRMO NelsonIRMO Hug, and IRMO Harrison) used to allocate options between separate property and community property. Generally, the community’s percentage interest in stock options that vest after the date of separation decreases as each year lapses.

Divorce courts look to a number of factors in determining which formula to use:

  • When was the grant made
  • Were the stock options granted to attract and retain the employee
  • Were the stock options granted for past service
  • Were the stock options granted to offset under-compensation
  • What are the forfeiture provisions
  • What are the vesting dates
  • What are the vesting provisions
  • Are the stock options designed as “golden handshakes” to retain the employee
  • What was the strike price at the time of grant
  • When did the parties separate
  • When did the parties marry
  • Were the stock options granted to replace other stock options

Under Nelson: If the options or RSUs were used to encourage the employee to stay with the company, the formula would be : (years from date options are granted to date marriage ends / years from date options granted to date options become exercisable) = The Community Interest

Under Hug: If the options or RSUs were used to reward for past services, the formula would be: (years from date of employment to date marriage ends / years from date of employment to date options become exercisable) multiplied by “the number of shares of stock which could be purchased on the date each option vested= The Community Interest

Under Harrison: The Formula equates the months between date of grant and date of separation over the months between date of grant and date that the stock fully vested and not subject to disinvestment.

RSUs for Support Purposes

If there is spousal support or child support, future vestings should be considered. Many companies grant RSUs on a recurring basis to some employees. Those future grants are part of the compensation available to that employee from which to pay support. Because the amount of this future income is not determinable, one option is for support to be based on a formula or percentage of future vestings. If considering that option, then it is important not to also divide those vestings as property. Otherwise, the same dollars would inappropriately be divided twice—once for property and once for support.

It is important that both the legal and financial aspects of RSUs be carefully addressed, and that possibilities appropriate to your unique situation are explored. There are both considerations and possibilities that are not discussed above.

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