Division of Stock Options and Restricted Stock Units in Divorce.
Introduction
In a divorce, assets like property, bank accounts, and retirement savings are often divided between the divorcing spouses. But what happens to stock options and restricted stock units (RSUs)? These types of assets are becoming increasingly popular as part of employee compensation packages, and it's essential to understand how they are divided in a divorce.
What are Stock Options and RSUs?
Stock options and RSUs are both forms of equity compensation offered to employees by their companies. Stock options give employees the right to purchase company shares at a predetermined price, called the exercise price, for a specific period. RSUs, on the other hand, grant employees the right to receive company shares at a specific time in the future, without the need to purchase them at a predetermined price.
Classification of Stock Options and RSUs
When it comes to dividing stock options and RSUs in a divorce, it's essential to determine whether they are characterized as community property or separate property. In community property states, any assets acquired during the marriage are generally considered community property and must be divided equally between the spouses. In contrast, in equitable distribution states, assets are divided based on what is deemed fair and equitable, regardless of when they were acquired.
Stock options and RSUs are typically classified as either community property or separate property based on when they were acquired. If stock options or RSUs were acquired during the marriage, they are generally considered community property and are subject to division. Suppose they were acquired before marriage or after the couple separated. In that case, they are typically considered separate property and are not subject to division, unless they increased in value during the marriage due to the efforts of both spouses.
Stock Options and RSUs: Valuation and Division
Determining the value of stock options and RSUs can be a complex process, as they are subject to market fluctuations and vesting schedules. To accurately calculate their value, it's essential to work with a financial expert who can provide a fair market valuation.
Once the value has been determined, the division of stock options and RSUs is subject to negotiation or court order. The spouses can agree to a division plan that works for both of them. Alternatively, the court can order a division plan if the spouses cannot agree on their own.
Division of Stock Options
When it comes to dividing stock options in a divorce, several methods can be used. The most common method is the "deferred distribution" method, where the non-employee spouse is granted a portion of the stock options. These options can be exercised at a later date, following the vesting schedule.
Another method is the "immediate offset" method, where the value of the stock options is offset against other assets, such as cash or property, that the non-employee spouse is entitled to receive.
Division of RSUs
RSUs are typically divided based on the "Time Rule" or the "Retirement Benefit Rule." Under the Time Rule, RSUs that vest during the marriage are considered community property and subject to division. In contrast, under the Retirement Benefit Rule, RSUs that vest after the marriage are not divided, but their value is used to calculate the employee's retirement benefits. An expert can help determine which method is most appropriate based on the individual case.
Tax Implications
It's essential to understand the tax implications of dividing stock options and RSUs in a divorce. The division of assets can trigger tax consequences for both parties, and it's important to consider these consequences and plan accordingly. A financial expert can assist with tax planning and help ensure that both spouses are treated fairly.
Conclusion
Dividing stock options and RSUs in a divorce can be a complex process, but it's critical to ensure that both parties receive an equitable share of the assets. It's essential to work with financial experts and attorneys to understand the various forms of equity compensation and how they are classified and divided under the law.