RSUs and Divorce: Legal Implications During a Separation‍

Casey Fenton

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December 7, 2023

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Imagine this: You've spent the last decade working tirelessly at a tech startup, climbing the corporate ladder. A part of your reward for all those late nights and weekends? A substantial number of Restricted Stock Units (RSUs) with a promise of financial stability and growth. You and your spouse celebrate these milestones together, dreaming of lavish vacations, early retirement, or maybe even that dream home you could afford once your RSUs vest. 

Fast-forward to this day and those dreams are shattered. Your marriage is falling apart, and divorce is imminent. As you sift through the complexities of marital assets, you suddenly wonder, "What happens to my RSUs?"

The question sends a wave of anxiety through you, and it's a crucial one you can't afford to overlook. This article aims to be your comprehensive guide on navigating RSUs in the context of a divorce or legal separation. Whether you are the employee who earned them or the spouse seeking a fair share, understanding the legal implications surrounding RSUs during a divorce can significantly impact your financial future.

Are Security Investments Considered Marital Assets?

Yes, security investments like stocks, bonds, and Restricted Stock Units (RSUs) are generally considered marital assets. However, the classification can be influenced by various factors, such as the timing of acquisition and the intent behind holding these securities. Below are some key considerations:

1. Timing of Acquisition

The date when you acquired the RSUs plays a pivotal role in determining whether they are considered marital assets. If you were granted RSUs prior to the marriage, they might be viewed as separate property, especially if there was no active effort during the marriage to increase their value. However, if you acquired these RSUs during the course of your marriage, they are generally considered marital property. Understanding this distinction can give you a clearer picture of what's at stake during the division of assets in a divorce.

2. Intent and Purpose

Another important aspect is the intent behind holding the RSUs. If these units were granted as part of your standard compensation package for services rendered during the marriage, they are likely considered marital property. Conversely, if you can prove that they were granted for efforts outside the scope of the marriage—perhaps for work done before your marriage or after separation—the classification might differ.

3. Pre-Nuptial and Post-Nuptial Agreements

You may have a pre-nuptial or post-nuptial agreement that explicitly dictates the handling of assets like RSUs. Such legal contracts can override default state laws, making them crucial in asset classification. If your agreement states that RSUs are separate property, or perhaps are to be divided in a specific way, those terms usually take precedence.

4. Marital vs. Separate Property

It's also possible that your RSUs could be a mix of marital and separate property. For instance, a portion of the RSUs might have vested before the marriage, making them separate property, while the rest are vested during the marriage, making them marital property. Understanding this blend is essential for an equitable division of assets.

Why RSUs are Considered Marital Property?

Restricted Stock Units (RSUs) are often considered marital property for several key reasons. These units generally represent a form of deferred compensation earned during the course of the marriage, but there are additional factors that can further cement their status as marital property.

1. Deferred Compensation

RSUs are not immediate payouts but are instead deferred compensation that vests over time. This is a crucial factor in classifying them as marital assets. When you receive RSUs as part of your employment package, you're essentially being awarded a future financial benefit for your current work. Since this work happens during the marriage, the deferred compensation—your RSUs—is commonly classified as marital property.

2. Equitable Distribution vs. Community Property

The legal framework your state follows—be it equitable distribution or community property—can also determine how RSUs are treated. In community property states, the division is typically 50/50, further supporting the notion that RSUs are marital assets. Equitable distribution states, however, might look into factors like the length of the marriage, the earning capacities of each spouse, and more, but still generally regard RSUs as marital property subject to division.

3. Employee vs. Employer Contributions

In some cases, RSUs are offered alongside other employment benefits like 401(k) plans. While employee contributions to retirement plans may be considered separate property in some jurisdictions, employer contributions—in the form of RSUs—are usually categorized as marital assets because they are a form of compensation for work done during the marital period.

4. Role of the Non-Employee Spouse

Don't underestimate the influence of the non-employee spouse when it comes to classifying RSUs as marital property. Courts often consider the "indirect efforts" of the spouse, acknowledging that their emotional or logistical support contributes to the career success of the employee spouse. This, in turn, can strengthen the argument that RSUs, earned during the course of the marriage, are indeed a marital asset.

5. Impact of Legal Agreements

Remember that pre-nuptial and post-nuptial agreements, if any, can override general rules. If there's an agreement in place specifying how RSUs are to be treated in the event of a divorce, such an agreement is likely to be the determining factor.

How RSUs Can Be Divided During Divorce Proceedings?

Dividing RSUs during a divorce is a complex process. Because these are non-liquid, future-oriented assets, the usual methods for asset division may not apply directly. Here are some factors that play a significant role in how RSUs can be divided during divorce proceedings.

1. The Role of a Qualified Domestic Relations Order (QDRO)

A Qualified Domestic Relations Order, or QDRO, is a legal document that provides the framework for dividing certain types of retirement and compensation plans, including RSUs. This order outlines the specific terms and conditions for distributing these units, considering factors such as the vesting schedule and tax implications. A QDRO is essential to ensure that both parties get their fair share without incurring unnecessary penalties or tax liabilities.

2. Vesting Schedules and Unvested Units

RSUs are subject to vesting schedules, meaning you don't own them outright until a specified period has passed or certain conditions have been met. Unvested units present a unique challenge in divorce settlements. Courts may decide to "freeze" these units until they vest, assigning each party a share at that time. Alternatively, the value of the unvested units may be estimated and offset against other assets in the settlement.

3. Tax Considerations

Remember that RSUs come with tax implications. Upon vesting, they're considered income, and both parties will be responsible for any resulting tax liabilities. Consider working with a tax advisor alongside your legal team to navigate the tax aspects of dividing RSUs efficiently.

4. Special Conditions and Performance Milestones

Sometimes, RSUs come with special conditions such as performance milestones or company-specific events (like IPOs or acquisitions) that trigger vesting. These can add another layer of complexity to the division process. Make sure you disclose any such special conditions to your legal team so they can factor them into the divorce settlement.

5. The Right to Sell or Transfer

Unlike other forms of marital property, RSUs often come with restrictions on your ability to sell or transfer them. These limitations can impact how they are divided during a divorce. In some cases, the spouse awarded the RSUs might have to hold onto them until they are allowed to sell, affecting the liquidity of the settlement for both parties.

6. Calculating Current and Future Value

The division may also depend on the valuation of the RSUs, both current and future. Since RSUs are tied to the performance of the company, their future value can be uncertain. Courts may employ financial experts to estimate this value, ensuring a fair division that reflects both present and potential future worth.

What Legal Framework Supports RSUs as Marital Assets?

The Uniform Marital Property Act (UMPA) and the Uniform Premarital and Marital Agreements Act (UPMAA) are two important frameworks that provide guidelines on classifying and dividing assets, including RSUs. These laws offer a detailed legal roadmap for how to handle RSUs during a divorce, but their application varies from state to state. Consult your local statutes or seek legal advice to understand how these laws affect your case.

Do RSUs Impact Alimony and Child Support?

Yes, RSUs can impact both alimony and child support calculations, although the extent to which they do can vary depending on jurisdiction, specific circumstances, and how the RSUs are classified. Here’s how RSUs could affect these crucial aspects of a divorce settlement:

  • RSUs as Income: One of the key factors courts look at when determining alimony and child support amounts is the income of both parties. RSUs, once vested, are considered a form of income. This means that they can significantly influence calculations for alimony and child support, potentially increasing the amounts to be paid or received.

  • Timing and Vesting Schedules: The timing of when the RSUs vest can add complexity to the matter. If RSUs are set to vest after the divorce has been finalized, a court may still consider them as future income for the purposes of alimony and child support. In such cases, adjustments to the original support calculations may be made once the RSUs vest.

  • Tax Implications: Just as with the division of RSUs, you must also consider the tax implications when it comes to alimony and child support. Alimony payments are often tax-deductible for the paying spouse and taxable for the receiving spouse. Because vested RSUs are considered income, they can affect the after-tax amount of money either party has available for alimony and child support.

  • Liquidity Concerns: RSUs, particularly those that have not yet vested, are not liquid assets. This poses a challenge when it comes to immediate financial needs for alimony or child support. Courts may consider other liquid assets or income streams for the short term, with the understanding that once the RSUs vest, they will be factored into future support calculations.

  • State-Specific Regulations: It's also crucial to remember that state laws can impact how RSUs are considered in support calculations. Some states may have specific guidelines on how non-liquid assets like RSUs should be treated, while others may leave more room for judicial discretion.

Because of the complex interplay between RSUs, alimony, and child support, it's advisable to consult both financial and legal experts. They can provide tailored advice based on your unique circumstances, helping to ensure a fair and equitable arrangement for all parties involved.

Valuing RSUs in a Divorce

Assigning a value to Restricted Stock Units (RSUs) in a divorce can be a complex undertaking, and it's an essential step to ensure an equitable division of assets. The value of RSUs is subject to market risks, tax implications, and specific conditions set forth by the company granting them. Here are some key factors to consider when valuing RSUs in a divorce.

  1. Present vs. Future Value: RSUs are unique because they have both a current and a future value. The current value is relatively straightforward to determine—it's the market value of the shares at the time of valuation. However, the future value depends on factors like the company's performance, market volatility, and the vesting schedule, making it harder to pin down. You may need to involve financial experts to provide a reasonable estimate of the RSUs' future value.

  1. Vesting Schedules and Conditions: The vesting schedule can greatly impact the valuation. RSUs that vest sooner are generally more valuable because they can be converted into cash or stock more quickly. Any special conditions, like performance milestones or company events that affect vesting, should also be factored into the valuation.

  1. Tax Implications: Tax liabilities can reduce the net value of RSUs. When the units vest, they are considered income, and both federal and sometimes state income taxes apply. The tax rate will depend on your income bracket and any additional state taxes. Understanding the after-tax value of RSUs can give you a clearer picture of their true worth in a divorce setting.

  1. Discounts for Lack of Marketability: Because RSUs are often subject to selling restrictions, their marketability can be limited. In some divorce cases, a 'discount for lack of marketability' might be applied to reflect these limitations. This discount adjusts the value of the RSUs to account for the constraints on your ability to freely sell them.

  1. Role of Expert Valuation: Due to the complex nature of RSUs, professional valuation may be necessary. Financial experts or forensic accountants specializing in divorce cases can assess the RSUs' value more accurately. These experts can also provide a valuation report, which can be pivotal evidence during divorce proceedings.

  1. Consideration of Other Assets: Sometimes, the value of RSUs may be offset by other marital assets. For example, one spouse may keep more of the family home's equity in exchange for the other spouse keeping more RSUs. Such negotiations require a solid understanding of the RSUs' value relative to other assets in the marital estate.

Various States' Law on RSUs During Divorce

The way RSUs are treated during a divorce varies significantly from state to state, influenced by the underlying legal framework—namely, whether the state follows community property or equitable distribution laws. Here's a closer look at how state-specific regulations can impact the division and valuation of RSUs.

Community Property States

In states like California, Texas, and Arizona that follow community property laws, assets acquired during the marriage are generally considered shared property. This often means a 50/50 division, and RSUs are typically included in this category. Even RSUs that have not yet vested may be considered marital property subject to equal division, as long as they were granted for work performed during the marriage.

Equitable Distribution States

States like New York, Florida, and Illinois use an equitable distribution model. In these states, marital property doesn't have to be divided equally but must be divided fairly. Courts have more discretion and may consider a variety of factors, including each spouse’s contributions to the marriage and financial circumstances. RSUs are generally still treated as marital property, but their division might not be as straightforward as in community property states.

Hybrid Approaches

Some states have nuanced or hybrid approaches to asset division, including RSUs. In these jurisdictions, certain conditions like the reason for the RSU grant (e.g., as a signing bonus versus a performance incentive) might influence whether they are considered marital property.

State-Specific Case Law

In addition to statutory laws, case law can also significantly influence how RSUs are treated. High-profile divorce cases within a state that have involved RSUs can set precedents for future cases. Be sure to consult a legal expert familiar with your state’s case law to understand its implications for your situation.

Precedence of Legal Agreements

It's important to note that pre-nuptial or post-nuptial agreements can override state laws. If you have an existing agreement that outlines the division of RSUs, courts in most states will honor it, provided it meets legal criteria for enforceability.

Given the complexities and variations in state laws, it's crucial to consult a legal expert who is well-versed in your state's specific regulations on RSUs and divorce. Their advice can make a significant difference in how your assets are divided and valued.

How to Talk to Your Divorce Lawyer About RSUs

When discussing RSUs with your divorce lawyer, make sure you come prepared. Gather all pertinent documentation—such as RSU grant agreements, vesting schedules, and your employment contract. Explain any special conditions that may apply, like performance milestones or company-specific rules. Ask pointed questions about valuation methods, potential tax implications, and the likely influence of RSUs on alimony or child support.

Dealing with RSUs during a divorce is a complex process that demands specialized legal expertise. Understanding the status of your RSUs as marital property, their valuation, and their impact on spousal and child support can make a significant difference in your financial future post-divorce. Armed with this information, you're better positioned to navigate these choppy waters and emerge with a fair and equitable settlement.

For concerns on your RSUs other than divorce settlements, feel free to browse Upstock’s blog or find a brief explainer of this equity model through the site’s learning materials page.

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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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