Aviva Pinto is a CDFA, CDS and Managing Director and Wealth Manager at Wealthspire Advisors.
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If you are divorcing and have a spouse who has restricted stock units (RSUs) from their company, such as restricted stock options or shares linked to the performance of a public or nonpublic company, how can they be divided?
Many startups, nonpublic private companies and public companies provide executives with restricted shares as a form of compensation for past services rendered, to incentivize employees to remain with the company or a combination of the two. If acquired during a marriage, they will likely be considered marital property subject to division upon divorce.
Different states have different laws regarding equitable distribution and community property. For example, New York and New Jersey are equitable distribution states, California is a community property state and Connecticut does not distinguish between marital or separate property. Please consult your matrimonial attorney for the laws that pertain to your jurisdiction.
Determining whether restricted stock units are separate or marital property will depend on when they were granted, when they vest and whether the vesting is contingent upon the company or employee meeting performance benchmarks. Whether they were granted as a reward for past performance (which could have been during the marriage or preceding the marriage) or for future performance is also a factor taken into consideration in determining what portion, if any, is subject to division.
If the RSUs were granted and vested during the marriage, they are most likely considered marital property. If they vest after the divorce filing, there could be a marital portion and a separate property portion. If the employee received the grant(s) prior to the marriage but they vested during the marriage, there will be a marital portion and a separate portion.
Beyond determining the marital and separate component of RSUs lies an even greater problem—how to value the options. Because the units are subject to vesting schedules and the value can increase or decrease, careful consideration must be given to how you approach their ultimate division to ensure you will be making the right choices and getting a fair settlement.
There are a number of ways to split restricted stock options in a divorce.
The employee spouse can buy out the other spouse’s share. That would be advantageous if you are afraid of a future drop in value and you want cash right away. However, you may be leaving a lot on the table. For example, if the company is a startup and becomes very successful, you will miss out on the future increase in value. Stock prices will also fluctuate with the market and company performance.
Alternatively, the employee can hold the nonemployee spouse’s shares in “constructive trust.” It is not a trust in the formal sense. The employee-owner agrees that they must maintain the account for the ex-spouse until the options are exercised and then they can be split.
Finally, some companies allow for in-kind division after vesting and prior to exercising the options.
The tax implications on various types of restricted stock units are complicated, so it is best to work with an accountant and make sure the ultimate agreement contains both a procedure for how to determine the applicable taxes and how to resolve any disagreement(s).
For the buyout option—the question is—at what price?
With market traded stock options, the common way to divide them is for the divorcing employee to keep the stock options while giving the spouse other assets with the equivalent value. To do that, the employee spouse and nonemployee spouse must agree on the current value of the stock options net of applicable taxes.
Publicly traded stock can be valued easily by taking the marital property portion and multiplying the number of vested options by the stock price on the date of the divorce filing or when payments start in a divorce. A CPA can help you calculate the pretax value, help you apply a tax discount and divide the result between the two spouses.
For startup and nonpublic companies, agreeing on valuation is much more complex. It requires assumptions about the success of the company, the level of risk, future tax consequences and, potentially, discounts for control and marketability.
In lieu of a buyout, you can also trade other assets such as the house or a portion of a retirement account.
If an employee leaves a company to go to another company before the options vest, but is made whole by a new company, there needs to be a clause in the divorce stipulation so that the nonemployee spouse does not lose the bargained-for benefit of shares/options from the prior company.
As you can see, there are many details to consider. You might consider working with a wealth manager who is is a Certified Divorce Financial Analyst and proficient in dealing with restricted stock in divorces.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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