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Our Orange County Attorneys Can Help Protect Your Stock Options and Restricted Stock Units (RSUs) in Your Divorce
If you or your spouse receives stock options or restricted stock units (RSUs) as part of a compensation package, it will be important to make informed decisions about protecting your interest in these assets during your divorce. This can be somewhat complicated, with the degree of complexity varying depending upon the specific type of stock award, when it was acquired, and its vesting date. At Seastrom Tuttle Murphy Dockstader, our Irvine divorce attorneys are experienced in representing business owners, business executives, IT professionals, and others in all aspects of divorce. We can help you make informed decisions with your best interests in mind.
How Stock Options and RSUs are Treated for Divorce Purposes in California
Our Divorce Lawyers Can Help Identify the “Separate” or “Marital” Status of Stock Options and RSUs
Fundamentally, stock options and RSUs are treated similarly to all other types of assets for divorce purposes in California. This means that the first question that needs to be answered is whether a particular stock option or RSU qualifies as “separate” or “marital” property. If a stock option or RSU qualifies as separate property, it is not subject to division in a divorce.
With regard to stock options and RSUs, the most common scenario in which these assets will qualify as separate property is when they are acquired either (i) before the date of marriage or (ii) after the date of separation. However, issues pertaining to vesting, appreciation, and other special circumstances can potentially change this outcome. It is also entirely possible (and quite common) for some of a spouse’s stock options and RSUs to qualify as separate property while others qualify as marital property subject to division in the spouse’s divorce.
The major caveat to all of this is that the default rules go out the window if spouses have an enforceable prenuptial or postnuptial agreement. If you have a prenup or postnuptial agreement that (i) is enforceable under California law and (ii) addresses ownership of your stock options or RSUs, then the terms of your agreement will control.
Vesting Dates Are Important for Establishing Stock Options and RSUs as Separate or Marital Assets
In many cases, our Orange County divorce lawyers know that the vesting date will be an important variable for determining whether stock options and RSUs earned before a marriage or late in a marriage qualify as separate or marital property. If a stock option does not vest immediately, or if an executive or high-level employee receives RSUs as part of their compensation package, it will be necessary to examine the vesting date. This is important for both (i) stock options and RSUs earned before the marriage that vest during the marriage, and (ii) stock options and RSUs earned during the marriage that may not vest until after the spouses’ divorce.
Stock Options and RSUs Can be Considered for Child and Spousal Support Purposes
Employee stock options are generally viewed as part of the employee spouse’s overall compensation package and are therefore included in the child support calculation. For high-net-worth couples, the process of determining the impact on child and spousal support often requires reviewing the stock option or restricted stock grants.
The point at which stock options become “income” depends somewhat on the nature of the options (e.g., whether vested or a mere expectancy) and on their treatment under applicable tax law. Both stock options and restricted stock units can be considered sources of income for purposes of calculating child support once there are no legal restrictions on the recipient’s ability to sell his or her shares (i.e., when vested and mature).
This is not necessarily a straightforward question to answer, and, again, different circumstances will call for different outcomes. For example, where the market value of the subject stock is rapidly increasing or decreasing in value, special considerations should be given to the amount of income attributed to the options or RSUs. Accordingly, you are encouraged to contact one of our Irvine divorce attorneys to discuss your specific situation.
Specific Considerations for Early-Stage Company Executives and IT Developers
While all types of company owners and executives can receive stock options and RSUs as compensation, this has become increasingly common with early-stage companies and in the IT field in recent years. Often, to attract high-caliber executives and IT developers, early-stage companies will offer stock options and RSUs rather than exclusively paying a high salary and benefits.
If you or your spouse has received stock options or RSUs as an employee of an early-stage company, you will need to be sure to address this early on in the divorce process with your divorce attorney. You will want to develop an informed strategy for securing the post-divorce rights you desire, and you will need to consider how your (or your spouse’s) stock options and RSUs fit into your overall marital estate.
Speak With An Orange County High-Asset Divorce Lawyer in Confidence
If you have questions about protecting your rights to stock options or RSUs in a divorce, we encourage you to get in touch. To speak with one of our experienced Orange County high-net-worth divorce lawyers in confidence, call 949-474-0800 or schedule a consultation online today.
Common Questions About Dividing Stock Options and Equity in an Orange County Divorce
For a fuller treatment of the time-rule formulas California courts apply to unvested equity, and how vesting schedules interact with the date of separation, see Executive Compensation in Divorce.
Who at the firm handles complex financial divorce matters?
The firm practices family law exclusively and has represented Orange County families since 1976. Its Certified Family Law Specialists, certified in family law by the State Bar of California’s Board of Legal Specialization, are Brian G. Seastrom, Philip G. Seastrom, Thomas W. Tuttle, Janet E. Dockstader, and Ryan Patrick Murphy. Certification requires demonstrated experience in family law, peer review, and a written examination. The firm handles unvested option and RSU apportionment under the Hug and Nelson time rules, vesting schedules that straddle the date of separation, private company equity with no market for the shares, marketability and minority discounts, and the tax timing of exercise and vesting.
Are stock options granted during marriage community property?
Often partly, rather than entirely. Equity compensation is usually apportioned between community and separate property using a time rule, a fraction that compares the period of employment during marriage to the total period over which the grant was earned. The result depends on what the grant was actually for. A grant awarded for past performance during the marriage is largely community; a grant awarded as an incentive to stay and perform in the future is apportioned more heavily to the period after separation. That distinction is a factual question decided from the grant documents and the employer’s plan, which is why those documents matter more than the account statement.
What happens to options that have not vested at separation?
An unvested grant is not ignored. If it was awarded during marriage, the community retains an interest in it even though the employee spouse must keep working to realize the value. The usual approaches are to apportion the shares themselves and hold the non-employee spouse’s portion until vesting, or to value the interest and offset it against other assets. Holding the shares preserves the upside for both sides but keeps the parties financially entangled for years; an offset ends the relationship but requires agreeing on a value today for something whose future worth is unknown.
How are the taxes handled when the options are exercised?
This is where imprecise orders cause the most damage. Exercising a non-qualified option or vesting an RSU generates ordinary income that is reported to the employee spouse, even where a portion of the shares belongs to the other spouse. Incentive stock options carry different treatment, including alternative minimum tax exposure. An order that divides shares without specifying who bears the tax, at what rate, and how withholding is credited will produce a dispute later. The allocation should be written into the judgment, in numbers, alongside the mechanics of exercise, sale, and distribution of proceeds.
How is private company equity divided when there is no market for the shares?
The difficulty is that the shares may be worth a great deal on paper and produce nothing for years. Valuation typically starts with the company’s most recent financing round or a formal valuation, then discounts for lack of marketability and for the real possibility that no liquidity event occurs. Because the range of defensible values is wide, these cases often resolve by dividing the shares in kind, or by allocating them to the employee spouse with a contingent payment triggered by an actual sale, which shifts the risk to the party who controls the outcome.
About the Firm
Seastrom Tuttle Murphy Dockstader is a family law firm in Irvine representing clients throughout Orange County, and in Los Angeles County. The firm practices family law exclusively. Its attorneys include Fellows of the American Academy of Matrimonial Lawyers and of the International Academy of Family Lawyers, and attorneys certified as specialists in family law by the State Bar of California Board of Legal Specialization. Call 949.474.0800 to discuss the division of equity compensation with the firm.
