Compensation packages may include much more than a paycheck. For many employees, particularly executives and professionals in the technology, finance, and biotechnology industries, restricted stock units and stock options can represent a significant portion of their overall compensation.
During a divorce, these benefits may need to be identified, valued, and addressed as part of the financial settlement. Even awards that have not yet vested should not be overlooked.
What Are RSUs and Stock Options?
Restricted stock units, commonly called RSUs, are a promise from an employer to provide an employee with shares of company stock or their cash value after certain requirements are met. Those requirements often include remaining employed through a specific vesting date.
Stock options allow an employee to purchase company stock at a predetermined price. Their value may depend on the company’s stock price, the option’s exercise price, and whether the options have vested.
Because these awards are tied to employment and may become available over several years, determining their value during divorce can be complicated.
Are Unvested Awards Considered in Divorce?
An award does not necessarily have to be vested or immediately available to be relevant during a divorce.
One important question is why the employer granted the award. Stock-based compensation may reward work already performed, encourage the employee to remain with the company, compensate for future services, or serve several purposes at once.
The grant date, vesting schedule, employment history, and terms of the compensation plan may all help determine whether some or all of an award should be considered in the division of marital property. Massachusetts courts consider each spouse’s property, income, liabilities, needs, and opportunities to acquire future assets and income when dividing property. (Massachusetts General Court)
Why Timing Matters
RSUs and stock options often vest in stages. For example, an employee might receive an award during the marriage, but portions of it may not vest until after the divorce.
The spouses may need to determine which portion of the award is connected to work performed during the marriage and which portion relates to future employment. This analysis can become particularly important when awards were granted shortly before separation or vest soon after the divorce.
Plan documents, employment agreements, grant notices, vesting schedules, and account statements can provide important information.
How Are RSUs and Stock Options Valued?
Vested shares of a publicly traded company may be relatively straightforward to value using the current market price. Unvested RSUs and stock options can be more difficult because their future value is uncertain.
Stock options may have little or no current value when the exercise price is higher than the company’s stock price. Their value can also change significantly before they are exercised.
Taxes must also be considered. Different types of stock options can receive different federal tax treatment, and taxable income may arise at exercise, vesting, settlement, or sale, depending on the award. (IRS)
How Can These Assets Be Divided?
RSUs and stock options may be addressed in several ways. The employee spouse may retain the awards and provide the other spouse with a share of their value when they vest, are exercised, or are sold. In another arrangement, the other spouse may receive additional marital assets to offset an agreed-upon value.
The compensation plan may prohibit transferring an award directly to a former spouse. When that happens, the divorce agreement may need to explain how the employee will notify the other spouse, handle taxes, and distribute the appropriate share.
Clear language is essential because these awards may not vest or become payable until years after the divorce.
Speak With a Massachusetts Divorce Attorney
RSUs and stock options can affect property division, income calculations, taxes, and post-divorce financial planning. Identifying every award and understanding its terms are important steps toward reaching a fair resolution.
Attorney Karla Mansur helps clients understand complex compensation packages and other financial issues that may arise during divorce.
Contact Mansur Law Group or call us at (978) 673-6702 to learn more about protecting your financial interests during the divorce process.
This article is for general informational purposes only and is not legal advice.