Many Bay Area companies, especially tech companies based in Silicon Valley, compensate business executives and highly skilled employees through deferred compensation methods such as restricted stock units (RSUs) that vest over time to attract and retain top talent.
As RSUs become a more common type of compensation, they can also become a significant source of conflict in divorce. If you or your spouse received RSUs as part of a compensation package, it would be essential to note how the complex asset will be divided and learn how to protect your assets during your divorce.
California law states that anything earned during a marriage is community property, including RSUs. Investopedia defines RSUs as a form of stock-based deferred compensation used to reward employees. RSUs will vest at some point and have some value upon vesting unless the underlying company stock becomes worthless, unlike stock options. According to Fidelity.com, depending on your company’s plan rules, the RSU is usually restricted because it is subject to a vesting schedule, based on a few factors, including length of employment or performance goals, with the employee receiving the shares after the vesting date.
While many are familiar with how stock options work, most people are unfamiliar with the rules of RSUs. While they are both forms of stock-based compensation that companies use to incentivize and reward employees, there are some differences between the two. SmartAsset defines a stock option as the right to buy a specific number of shares of company stock at a pre-set price, known as the “exercise” or “strike price,” for a fixed period, usually following the “vesting period.” RSUs, on the other hand, generally have some value, but in the end, both methods can be valuable forms of compensation for employees. RSUs are essentially a compensation method based on the promise that the company’s stock will be worth a considerable amount in the future, although there are no guarantees that will be the case.
If someone owns RSUs and gets divorced, all shares of company stock earned during the marriage will be considered marital assets and distributed according to the terms of the divorce agreement. Also, how the employer structures, projects, and promises compensation will affect whether and how the parties factor those future considerations into the divorce settlement.
If our firm represents the employee in a divorce proceeding, our goal is to characterize delayed compensation as reimbursement for later performance. If we represent the other spouse, we want any deferred compensation to be considered upfront as presently earned income, with only defer payment in compensation plans that vest gradually, the employee’s spouse may claim a community interest in those options that have been earned as of the date of separation.
Stock option valuation is a highly complicated and volatile area of family law, and in many cases, the company forbids the transfer of options to a spouse. Typically, a constructive trust is created, which obligates the employee spouse to maintain their former nonemployee spouse’s options to be exercised later. The trust also provides for the sale of these options once they mature, upon which the employee spouse then pays the net proceeds to the nonemployee spouse.
Schoenberg Family Law Group, P.C., has extensive experience in negotiating and litigating this hotly contested issue. We represent high earners and spouses of high earners in the characterization and valuation of deferred compensation in property division and determination of spousal support and have successfully argued for the most favorable disposition of this significant asset to our clients.
Written by Debra Schoenberg
