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Dividing Stock Options and Restricted Stock Units in Divorce
Lindsey Obenhaus | November 13, 2018
Stock options and Restricted Stock Units (RSUs) are assets that many couples divide in their divorce, especially when one spouse is a high-level employee of a company. These assets can be tricky to divide because of disagreements over their character and value.
Stock options and RSUs are not the same. The timing, value, and purpose of stock options and RSUs are different from one another. Stock options, generally, give an employee the right to buy company stock at an attractive set price in the future. RSUs are company shares that are awarded to employees but are not transferable (meaning they cannot be sold) until certain conditions have been met (usually a “vesting” period). These two assets are similar in the sense that their value will be realized at some point in the future, rather than right away.
The employee-spouse may feel entitled to keep all his or her stock options or RSUs that were earned by his or her past (and possibly future) employment in the divorce. The Texas Family Code, however, allows for all or a portion of these shares and units to be considered as assets in the divorce property division. This applies to both vested and unvested units. The primary question faced by parties with these types of assets is whether to characterize them as separate property or community property. There are two common situations that can complicate the answer: first, when an option or RSU was granted to the employee spouse prior to marriage and vests during the marriage; or second, when an option or RSU was granted during the marriage, but has not yet vested at the time of divorce.
The separate or community property interest in stock option plans or restricted stock plans is determined using a formula set forth in the Texas Family Code. Timing is everything, so it is important to talk to your attorney about how to properly characterize these types of assets early in your case.
The best reference tool when characterizing or dividing stock options and RSUs is the option or share agreement issued by the employer. This document will contain information helpful to determining what rights the employee spouse has with the shares and units. For example, it may include descriptions of different categories of shares; if there are specific restrictions on the shares; or what happens if the employee resigns or is terminated from the company.
There are different approaches to valuing stock options and RSUs. It may be best to consult with a forensic accountant or trusted financial expert during your case to discuss the best approach for your unique circumstances. As a practical matter, consideration should be given to the income tax impact of awarding these assets to eliminate unwanted tax consequences after the divorce.
If you are facing a divorce and have questions about stock options or restricted stock units, working with a family law attorney at GoransonBain Ausley may make the process more manageable.