As part of the divorce process, both parties are required to complete a financial disclosure. This ensures both parties have a complete picture regarding finances. The financial disclosure includes details about all assets and compensation, including and Restricted Stock Units (RSU) grants. Before understanding how RSUs are divided in a divorce, let’s review a few basics.
Restricted Stock Units
RSUs are one of many ways employers can provide employees with an opportunity to share in the company’s overall success, thus providing an incentive for employees to remain with the company and help it perform well.
This form of stock-based employee compensation is “restricted” because they are subject to a vesting schedule based on length of employment or performance goals. Most RSUs have a vesting period that may last several years, meaning they hold no tangible value until vesting is complete.
Once the vesting period is met, shares can be sold at the employee’s discretion. Upon vesting, shares are considered income, and a portion of the shares is withheld to pay income taxes.
A critical way that RSUs differ from traditional stock options is that even if the share price falls after shares are granted, the RSUs always have some value. In most cases, if an employee chooses to leave a company prior to the vesting period, any unvested RSUs are usually forfeited.
As you can see, fully vested RSUs can hold great value. However, seeking RSUs as compensation during a divorce can be challenging because their value fluctuates over time.
There are two different options for dividing RSUs. First, the employee spouse can keep the RSUs and buy out the other spouse’s interest based on the current value. The second approach is called deferred division. This option requires the employee spouse to continue to hold the unvested RSUs until the RSUs are released. At that time, the non-employee spouse would receive their share of the vested RSUs.
There are advantages and disadvantages to both options. For example, having your spouse provide the value of the RSUs now could mean missing out on future gains. Before choosing this option, you should consider the state of the company. For instance, is it still in a start-up phase with room to grow? However, by getting the value of the options upfront, you eliminate the risk of future drops in value.
RSUs as Marital Property
If RSUs are granted and vested during a marriage, they will likely be considered marital property. This means you are entitled to a portion as part of your divorce settlement. However, unvested RSUs are more complex.
The time-delayed value of RSUs makes this a complicated asset to divide in divorce cases. When it comes to unvested RSUs, the main question is whether this financial instrument should be treated as assets or a source of future income.
As an asset, it becomes subject to division. Under Massachusetts divorce law, if an unvested RSU is treated as an asset, the other spouse may be eligible to receive 50% of the value of the RSU. However, as future income, it becomes a source from which alimony or child support can be paid. In this situation, the other spouse may receive a substantially smaller share of the unvested RSU, usually between 15% and 35%.
Several factors influence what part of RSUs are considered community property, for instance:
- Has the RSU award been granted?
- What is the vesting schedule?
- What are the vesting criteria? Are the RSUs vest over time, or is vesting contingent on performance metrics?
- What is the reason for awarding the employee RSUs? (If the RSU was granted for past performance, a spouse might stake a claim after separation for work that took place during the marriage.)
As you can see, determining the marital portion of RSUs can be complicated. Most RSUs do not allow an employee to transfer ownership of restricted shares to their spouse, making the division of this financial instrument even more complex. If you are considering divorce and need help preparing or understanding your financial disclosure, I can help. Contact me at (508) 752-2727 to arrange a consult to discuss your divorce options.