How Do California Courts Divide RSUs?

In California, where Silicon Valley firms often dish out equity to employees as a form of compensation, the net worth can skyrocket once a company gets sold or goes public. However, determining who is entitled to the value of those assets can be extremely complicated in a divorce. In particular, restrictive stock units (RSUs) present a challenge for couples who no longer wish to remain married. If you’re concerned about what could happen to your holdings in a divorce, you should speak with an Irvine divorce attorney at our firm who can help.

How are RSUs Different Than Stock Options?

Stock options are a contract that guarantees that the holder will be able to purchase a company’s stock at a particular price at a given date. That’s especially attractive for employees of growing companies, whose stock will likely climb significantly over time. An RSU, however, is a contract guaranteeing that the holder will receive a share of stock in the future, without ever having to pay for them. These types of stock units are usually designed to encourage employees to remain at a company until its successful, so that they may contribute to its success. Once these stocks vest, however, the owner will be required to pay ordinary income tax on them.

How are RSUs Treated in a Divorce?

California is a community property state, which means that all assets acquired by the couple while they were married will be considered marital property and therefore wholly divisible under the law. So, even if only one spouse in the relationship has earned RSUs as part of their compensation package at a technology firm, both will be entitled to reap the benefits of it in a divorce. RSUs that were granted and vested during the marriage will be quite easy to divide since those assets can be sold off and split between the parting spouses. Where it gets tricky, however, is when the RSUs have yet to vest, and the former spouse wants to lay claim to the profits. At that point, an experienced Irvine divorce attorney will have to step in and counsel you through the process.

There are a variety of ways your attorney might suggest dividing these assets. The first involves appraising the RSUs that have not yet vested by the date of separation and ordering that the spouse is given the equivalent value once they do vest. Another option would be to wait until the RSUs vest after the divorce and divide them then. Finally, the last option would be to use California’s Hug and Nelson formulas to divide the RSUs.

What are the Hug and Nelson Formulas?

The Hug and Nelson formulas help courts divide RSU assets in a divorce. These formulas will generally use the hire date, separation date, RSU grant date, vesting date, and the number of shares to determine how much is owed to the divorcing spouse at the time of the split. The Hug formula will be used when the RSUs are a reward for past performance, and the Nelson formula is designed to incentivize the employee to stay with the company.

Contact an Irvine Divorce Attorney to Learn More

Tech employees often have a lot to lose in a divorce. If you’re concerned that your RSUs will be significantly diminished in a divorce, you should contact an Irvine divorce attorney to explore your options.

Frequently Asked Questions

Are RSUs granted during marriage always community property?

Not always entirely. Restricted stock units are apportioned between community and separate property using a time rule that compares employment during marriage to the full period over which the grant was earned. The result depends on what the grant was for. Units awarded for past performance during the marriage are largely community; units awarded as a retention incentive requiring future service are weighted more heavily toward the period after separation. The grant agreement and the company’s plan documents decide this, not the account statement.

What happens to RSUs that vest after the date of separation?

They are still divided to the extent the community earned them. The community retains an interest in units granted during marriage even though vesting occurs later and requires continued employment. The two usual approaches are to apportion the shares and hold the non-employee spouse’s portion until vesting, or to value the community interest now and offset it against other assets. Holding shares preserves the upside for both spouses but keeps them financially entangled; an offset ends the relationship but requires agreeing today on a value that is genuinely unknown.

Who pays the tax when RSUs vest?

Vesting generates ordinary income reported to the employee spouse, and the employer withholds shares or cash to cover it, even where part of the award belongs to the other spouse. An order that divides units without specifying who bears the tax, at what rate, and how the withholding is credited will produce a dispute at the next vest. The allocation should be written into the judgment in numbers, along with the mechanics of when shares are sold, who directs the sale, and how proceeds are distributed.

What documents are needed to divide RSUs correctly?

The grant agreements for every award, the equity plan document, the vesting schedules, and the full transaction history from the equity administrator showing grants, vests, sales, and withholding. Employment offer letters and promotion documents help establish whether an award was for past performance or future retention, which is the fact that drives the apportionment. Working from a single brokerage statement is how community interests get missed, because a statement shows the current position rather than the history that determines its character.