Divorce and Restricted Stock Units Distribution
Many employers reward their executives and other employees with company stock, often in the form of restricted stock units (RSUs), as part of their compensation packages. The restricted stock typically attains value after the employee has vested through years of service or achieved performance milestones. RSUs are often used to help retain employees.
If someone who holds RSUs goes through a divorce, any of the shares of company stock earned during the marriage will be deemed marital assets to be divided in the separation agreement. The question then becomes how to value an interest in a company stock that may be partially or wholly unvested, and what is an equitable distribution of this value?
A divorce lawyer at Charles R. Ullman & Associates in Raleigh, NC, can help you work through the division of restricted stock units that you or your spouse holds as you proceed with separation and divorce. Charles Ullman is certified as a Specialist in Family Law by the North Carolina State Bar. He is well-versed in the complex process of marital asset division. We can help determine a fair valuation of your RSUs and advocate on your behalf in divorce negotiations over the division of marital assets. We can fight efforts by your estranged spouse to devalue assets or hide income from RSUs.
What Are Restricted Stock Units?
A restricted stock unit (RSU) is a type of deferred compensation. RSUs are a promise from the employer to deliver stock or cash to the employee in the future, based on the company’s financial performance.
RSUs are stock that a company gives to an employee as part of the compensation package and without requiring their purchase. They should not be confused with stock options, which grant the option to purchase company stock at a predetermined and possibly discounted price.
The stock in an RSU is restricted because it is subject to a vesting schedule. The schedule may be based on length of employment or on performance goals. RSUs typically have restrictions on transfers or sales. A company that is not publicly traded may grant RSUs that can only be sold back to the company.
An employee’s RSUs may become sellable at once after a certain length of employment—10 years, for example – or on a graded schedule, with a percentage of RSUs vesting with each year of service. The employer is required to withhold applicable federal, state, and local income taxes from RSU payouts.
Once an employee’s RSUs vest, they are treated as regular business shares. This means their value may rise or fall with the fortunes of the business. Public stock will be valued by the market, while a private company is expected to apply a fair market value to its stock based on a consistent application of a reasonable book value or a reasonable multiple of earnings.
If the employee leaves the company, any unvested RSUs they hold are typically forfeited.
Are Restricted Stock Units Marital Assets or Separate Property?
The division of marital assets and debts is one of the most contentious issues in a divorce.
Three Steps to Dividing Marital Assets
- All assets are identified and classified as either separate or marital
- A value is attached to each marital asset
- Marital assets are divided between the spouses equitably. North Carolina courts favor a 50/50 split.
In a North Carolina divorce, marital assets are property acquired during the marriage. An employee may receive restricted stock units on a set timetable or for achieving specific performance goals. RSUs granted during the marriage would be considered marital assets to be divided evenly. If RSUs held in a spouse’s name were issued before the marriage or after the couple separated, they could be excluded from marital property subject to distribution.
However, it may not always be that simple. A portion of RSUs granted as a reward for past work or as an incentive for future work may or may not be marital property depending on the date of issue. If a company grants RSUs annually for the previous year of service, only a portion of a year’s grant would be the marital property of a couple married or separated in the previous year.
Determining when RSUs were issued and in what number and for what period of work might require obtaining the spouse’s employment contract, company policies, and other documents.
Fortunately, North Carolina case law has settled another potential complication of dividing RSUs in a divorce. In our state, both vested and non-vested stock options are subject to distribution. If there are RSUs among the couple’s marital assets, their disposition will become part of the separation agreement, regardless of their maturity.
How to Value RSUs in a Divorce
If one divorcing spouse’s restricted stock units are to be divided as part of the separation agreement, this is a complication due to the changing nature of the value of the stock. Yet, the couple must come to an agreement, or the court will make the decision.
The value of a publicly traded stock is easily discerned. If a private company’s RSUs held by a spouse have fully vested and may be redeemed, their current value will be determinable. Otherwise, the company may be able to provide information about recently valued RSUs held by other employees or a financial projection of the company or its stock value. If no company stock has vested, it may not have an actual value.
Absent relevant figures from the company or the marketplace, determining the potential value of unvested RSUs may require a forensic accountant’s services.
There are multiple formulas for determining stock value. In North Carolina, the “coverture fraction,” a methodology typically used to value qualifying retirement plans, is favored. This formula divides the length of time a spouse was simultaneously married and earning stock units by the total length of employment during which the units were earned.
Another more complex approach is the Black-Scholes formula, which produces a theoretical estimate of the value based on derivative investment instruments as well as the historical price of the stock, the strike price, and the vesting schedule.
How to Divide RSUs in a Divorce
When dividing restricted stock units in a divorce, the first determination is how many existing RSUs are marital property then come to an agreement on a value.
Three Ways to Divide Marital Property Stock
- Sell-off. All stock that can be sold is sold off, and the proceeds are split. If there are unvested RSUs, the spouse who holds them pays the other spouse half of their total agreed-upon value.
- Buyout. The spouse who earned the RSUs keeps them and pays the other spouse half of the agreed-upon value.
- Deferred division. The couple agrees that the spouse who earned the RSUs will sell them at a later date, such as upon becoming fully vested and that they’ll split the proceeds at that time.
There is a risk with either choice. If the stock’s value suddenly increases after a selloff or buyout, the spouse who missed out on the increase in value would have no recourse. If a sale is deferred, the stock’s value could drop or become worthless if the company failed, or the spouse could leave the company before being vested.
A fourth option is for the divorcing spouse who does not hold the RSUs to receive a similarly valued marital asset in exchange for giving up his or her claim on the other spouse’s RSUs.
How RSUs Impact Alimony and Child Support
When a North Carolina court determines alimony and child support payments, it considers the needs of the child and the spouse requesting support and each spouse’s relative financial capabilities. Financial capabilities include monthly incomes and potential incomes, including restricted stock units.
The initial grant of the restricted stock is not considered income for income tax purposes, but a court may treat the vesting of RSUs as income when calculating child or spousal support. If the spouse were to sell any RSUs, any profit would be income available for purposes of calculating alimony or child support.
All this would be part of the negotiations toward a settlement agreement. As your attorneys, we would protect your rights and financial interests, regardless of whether you owned RSUs or were seeking to have them counted toward your ex-spouse’s obligation to you and your children.
Contact an Experienced Raleigh Divorce Attorney
At Charles R. Ullman & Associates, an experienced Raleigh divorce lawyer stands ready to assist you with every aspect of divorce, including the complex valuation and division of marital assets in the form of restricted stock units (RSUs), stock options, and other alternative compensation.
Contact our firm today to discuss how we can protect you financially during a divorce. Phone (919) 829-1006 or schedule a consultation online.