In short the answer is Yes. But, what if you have not vested in the RSU as of your settlement date? How is that handled in a divorce proceeding? Let’s talk about each topic further.
An RSU is considered marital property unless the holder of the RSU can prove the RSU was acquired through a gift, a non-commingled inheritance or via an agreement that outlines the RSU was taken in exchange for another marital asset.
When assessing whether an RSU is part of a marital estate it is important to look at:
- The vesting period of the RSU
- When the RSU was granted
- Whether the RSU has trigger events associated to it
- The terms of the RSUs and whether they will accumulate over time
- Whether the RSU was granted for past performance or based on future performance only
Certain states classify the value of a vested RSU as income if the RSU was deemed a performance related compensation. In these situations, the RSU may be included in the child support calculation and alimony calculation. Depending on the specifics of your situation, there are positions that can be taken on this during the divorce process to manage these risks. This assumes your divorce proceeding does not end up in a court of law where you have outsourced your decision. It’s possible to classify the RSU as marital property, not income per se, subject to property division only. Yet, if any income is generated from the RSU “investment”, that income may be considered part of an alimony or child support calculation.
In recent years, the courts have recognized there are loopholes as to how stock options, RSUs, stock appreciation rights and stock grants are handled in a divorce proceeding. The courts are providing more definitive guidance to close these gaps. As these guidelines emerge it will be important to review the new legislation in context to the actual stock plan as you may experience a conflict with the guidance in context to your plan. As a result, the new legislation may not be sufficiently definitive or create an unexpected outcome where the situation differs from your situation.
Whether an RSU is vested or not does not preclude the RSU from being included in the marital estate. The effective date of issuance is the demarcation date to determine whether an RSU is included in the marital estate. The settlement structure should address the time element of the RSU appreciating over time. It is important to note, even though certain plans include clauses that RSUs cannot be transferred to another person, in context to a divorce the non-participating spouse may consider becoming part of the stock plan. This should be addressed in your divorce decree and settlement structure. Unless the value of an RSU is known or knowable the marital estate should not assign a value to the RSU for purposes of property division. This does not mean the RSU does not have a future value and should not be included in the marital estate as a tradable component. Furthermore, within the US there are tax laws referred to as 409a for stock options. The IRS may deem the current value of the business as includable compensation for tax purposes even though the event may be transaction in the future. You will want to be careful how this is handled. If the RSU should have been included in your compensation for tax purposes yet it was excluded the IRS could require you to pay for back taxes, including interest and penalties associated to the underreporting of taxable income.
If the employee is terminated from the employer or voluntarily leaves the company, any unvested RSUs will likely become worthless assuming no other clauses exist in the stock plan. Foreign currency is another issue to address. Certain companies issue awards in the form of other monetary currencies. If the currency is in flux at the time the award is realized, the value of the award may change until the award is converted into cash.
Certain plans have terms where the award may lapse unless the employee accepts the award, if the plan institutes a formal acceptance process. The Board may have certain rights to issue or relinquish awards depending on the trigger events defined in the plan. The recipient may be subject to tax liabilities upon issuance of the RSU or when she or he finally receives the cash from a potential sale or related transaction. These tax liabilities may or may not be withheld from the employee’s paycheck. An employee may experience adverse consequences if she or he moves from her or his state of residence. Plans vary on these issues. A future transaction (sale of the business, IPO, demerger, etc.) can impact the realization of an award. Certain awards may be deemed part of a pension too. The non-employee spouse may also be able to require the employee spouse to trigger an event, if possible, to realize the value of the RSU at a certain point in time. These types of issues need to be analyzed and properly incorporated into your divorce decree.
In short, there are sensitive clauses in these plans where you may want a qualified financial professional skilled in the art of divorce to review the plan and evaluate how the components may impact your financial outcomes from your divorce.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.