Stock options and restricted stock units (RSUs) are assets many couples divide in their divorce when one spouse is an employee of a large company. These assets are often substantial and considered complex assets in a divorce. The process of valuing and dividing stocks in a divorce can be tricky because of the complexities of the character and value of the stock options or RSUs.
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). But these two assets are similar in the sense that their value is realized at some point in the future, rather than right away.
Are stock options and restricted stock units separate or community property?
The employee-spouse may feel entitled to keep all of the stock options or RSUs that were earned by their 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 divorcing spouses with these types of assets is whether to characterize them as separate property or community property. The following are two common situations that can complicate the answer:
A stock option or RSU was granted to the employee-spouse prior to marriage and vests during the marriage.
A stock option or RSU was granted during the marriage but is not 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. The formula considers factors such as:
The date the option or stock was granted
The date of marriage
The length of employment
The duration of any applicable vesting or restriction period
It is important to talk to your attorney about how to properly characterize these types of assets early in your case and develop a strategy for how to split stocks in a divorce.
What is the best way to value and divide stock options and restricted stock units?
There are different approaches to dividing RSUs and stock options in divorce:
An employee-spouse could buy out the other spouse’s share using other available funds.
The employee can hold the non-employee’s share in a constructive trust.
You could opt for in-kind division after vesting before exercising the options, if allowed by the company.
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 in determining how to split stocks in a divorce, including what rights the employee-spouse has regarding 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. These assets can be complex to value because there are many factors that can impact their total worth (company performance, grant date, volatility, etc.). A common approach is to use a formula based on the number of shares and the value of the stock on an agreed-upon date. There are also several formal valuation methods that can be used, or the parties may simply reach an agreement on the amount directly.
It is important to remember that typically, when stock options or unvested restricted stock awards are divided, they are not actually transferred from one spouse to the other. Rather, they are held in trust by the employee spouse for the benefit of the other. As a practical matter, consideration should be given to the tax impact of awarding these assets to either spouse. A tax professional can advise on the best strategies to equalize the tax effect if the parties will be dividing RSUs or stock options in divorce.
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Lindsey Obenhaus is an experienced Texas family lawyer who excels in handling complicated financial issues in divorce, including business and real estate valuations, complex property division, and asset tracing. Obenhaus was named D Magazine‘s Best Lawyer in 2021 and 2022 and was also named to D Magazine‘s Top Lawyers Under 40 for two consecutive years.
If you are facing a high-net-worth divorce and have questions about stock options or restricted stock units, please contact Lindsey Obenhaus at 214-373-7676 for more information or to schedule a consultation.
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Managing Partner P. Lindley Bain shares common tax issues that you should discuss with a qualified tax professional prior to reaching a final divorce settlement.
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