If you or your spouse receives stock options or Restricted Stock Units as part of an employment compensation package, don't overlook them during your divorce.
For executives and other highly compensated employees, stock-based compensation can represent a substantial part of their overall compensation. And dividing it isn't always as simple as looking at how many shares have vested.
What Are RSUs and Stock Options?
Restricted Stock Units, commonly called RSUs, are a form of compensation that generally gives an employee the right to receive company stock or its cash equivalent once certain conditions are satisfied.
Those conditions often involve remaining employed for a particular period, meeting performance requirements, or both.
Stock options work differently. They generally give the employee the right to purchase company stock at a predetermined price once certain conditions have been met.
Both can create complicated issues during a divorce because an employee may receive an award during the marriage that doesn't vest until months or years later. So what happens to it?
Are RSUs and Stock Options Marital Property in New Jersey?
They can be. But the fact that an RSU or stock option hasn't vested by the time a divorce begins doesn't automatically mean it's excluded from equitable distribution. The important question is why the employer awarded it and what the employee must do to receive it.
If an award was earned because of work performed during the marriage, it may be subject to equitable distribution even if it doesn't vest until after the divorce complaint is filed.
On the other hand, if some or all of an unvested award is compensation for work or performance that will occur after the marriage, that portion may not be subject to equitable distribution. That's why the grant date and vesting date alone don't necessarily answer the question.
Why Does the Purpose of the Award Matter?
Consider two employees who each receive RSUs shortly before a divorce begins.
The first employee receives an award as a bonus for excellent performance during the previous year. The second receives an award designed primarily to encourage the employee to remain with the company and perform at a certain level for the next four years. Those awards may look similar on an account statement. Legally, however, they may present very different issues.
New Jersey courts can look beyond the date printed on the award and consider what the employer intended the compensation to reward. Was it compensation for work already performed? Was it an incentive for future employment? Was it based on both?
Those questions can determine whether all, some, or none of an unvested award is included in the marital estate.
What Does M.G. v. S.M. Say About RSUs?
A New Jersey case called M.G. v. S.M. is particularly important when dealing with unvested stock awards. The court established a framework for determining whether stock awards are subject to equitable distribution.
If an award was made during the marriage and vested before the divorce complaint was filed, it is generally subject to equitable distribution. If it was awarded for work performed during the marriage but doesn't vest until after the divorce complaint, it can still be subject to equitable distribution.
The more complicated situation involves an award made during the marriage that requires future employment or performance before it will vest. In that situation, the employee spouse may be able to establish that some or all of the award relates to post-marriage services and therefore should not be divided. That can require a much closer look at the compensation plan.
What Evidence Can Help Determine What an Award Is Really For?
Don't assume that an account statement showing the number of RSUs or options tells the entire story.
In a case involving substantial equity compensation, I may want to see documents such as:
- The stock or equity compensation plan
- Individual grant agreements
- Award letters
- Vesting schedules
- Account statements
- Employment agreements
- Employer communications explaining the award
- Documents describing performance requirements
- Compensation statements and tax documents
Sometimes the language in these documents makes the employer's purpose relatively clear. Other times it doesn't. When significant money is involved, understanding exactly how the compensation program works can become extremely important.
How Do You Divide an Award That Is Only Partly Marital?
This is where these cases can become complicated. An award doesn't necessarily have to be treated as entirely marital or entirely separate.
If part of the compensation relates to work performed during the marriage and another part relates to future services, the marital portion may need to be determined.
You may hear lawyers and financial professionals discuss a coverture fraction or time rule when analyzing these awards. That type of calculation can consider the period associated with the marriage in relation to the entire period between the grant and vesting.
But don't assume there's one mathematical formula that automatically applies to every New Jersey divorce involving RSUs or stock options. The terms of the particular award matter.
What About Stock That Hasn't Vested Yet?
Another practical problem is that you may be negotiating your divorce today over stock that won't vest for several years.
Its future value may be unknown. The employee may leave the company before it vests. Performance conditions may not be satisfied. The company's stock price could rise or fall substantially. Taxes may also become due when the award eventually vests or is exercised.
That makes valuation and distribution more complicated than simply looking at today's stock price and multiplying it by the number of units.
How Can RSUs and Stock Options Be Divided?
There are different ways divorcing spouses can address equity compensation.
In some cases, the employee spouse may retain the award and the other spouse receives an appropriate share if and when it vests. In another case, the parties may agree on a value and offset the other spouse's interest with different marital property.
The agreement may also need to address taxes, what happens if an award never vests, when payments must be made, and what documentation the employee must provide in the future. The right approach depends upon the compensation plan and the rest of the marital estate.
Don't Forget About Taxes
The number of RSUs shown on a compensation statement isn't necessarily the same as the amount of money ultimately available for division. Taxes can substantially affect the net value of equity compensation.
You also have to be careful about who bears those taxes and how they're accounted for when the marital portion is eventually distributed.
For significant stock compensation, your divorce attorney may need to work with an accountant, valuation professional, or other financial expert to understand the actual economic value of the award.
Equity Compensation Can Be Easy to Miss
If you or your spouse receives substantial compensation through RSUs, stock options, bonuses, deferred compensation, or other employment incentives, don't treat the W-2 salary as the complete financial picture.
Find out what has been granted. Find out what has vested. Find out what hasn't vested. And most importantly, find out why the compensation was awarded.
That last question can make a significant difference in determining what is actually subject to equitable distribution.
If you're preparing for divorce and want to better understand property division and the other financial decisions ahead of you, my free Divorce Smarter Course will walk you through the major issues involved in a New Jersey divorce.
Until next time,
Steve