At the end of your divorce mediation with West Coast Family Mediation Center, our goal is to ensure that all your financial issues are resolved within your final judgment. But what if you have an asset, acquired during marriage, which will only have value at some point after the divorce is final? This is a typical experience for people with Restricted Stock Units (RSUs).
RSUs are a form of employment compensation that allows an employee to receive stock that may not vest for several years and during which time it cannot be sold.
Once those shares vest, they will operate like any other shares of a company’s stock. Additionally, there may be requirements on the RSUs themselves such as forfeiting any RSUs when an employee is terminated or when an employee fails to meet performance benchmarks.
It is important to be clear about RSUs during the financial disclosure phase of your divorce, to allow your mediator to guide you through all available options and considerations.
Executive Compensation & Divorce Financial Mediation
Executive compensation is a multi-dimensional issue, due to the variance in how companies may choose to motivate their employees.
For example, stock options and restricted stocks are not included on tax returns, W-2s, or most other financial statements unless the options have been exercised or the stock has vested. Therefore, your divorce mediator may request that the employee spouse provide any relevant supporting documents such as a summary of the plan, the award letter, the schedule of grants, annual statements of employee benefits, the transaction history of past awards, employment contract, and employee manual.
Overall, the documentation you provide will help to determine the marital interest of the RSUs. That determination may be influenced by a number of factors including:
- When the stock was granted;
- The details of the vesting schedule;
- Whether the stock vests over time or is contingent on meeting certain performance goals; and
- Whether the award was an incentive for future performance or a reward for past performance.
The tax implications of RSUs can also complicate decision-making. Important for child and spousal support or asset distribution, the entire value of the stock is included as ordinary income in the year an awarded stock vests, not the year of the award itself.
Under certain circumstances, gains would be taxed as a capital gain or capital loss if the stock decreases in value. Moreover, the receiving employee is required to pay the ordinary income tax even if they decide not to sell until a later date and hold onto the shares.
Options for Restricted Stock Units in Divorce
Considering the long-term implications of vesting stocks we’ve reviewed, there are generally two main ways that RSUs can be divided at divorce.
The first option is to divide the RSUs as a current asset. For example, the spouse who received the RSUs can buy-out the interest of the other spouse based on the current value. If you prefer this option, you may look at taxes and whether there are any forfeiture provisions when making final decisions.
The second option is to defer division until there is an actual value. With this option, the employee spouse continues to hold the stock in their name until it vests. Then, the non-employee spouse can receive their share of the vested stock. Be aware that the tax typically remains with the employee spouse, and you may need to determine how to handle paying the tax bill together, now or at the future date.
Take time at the beginning of your divorce process to accurately describe what you have to divide – it will save you time, money, and hopefully a trip to court.
Looking for financial advice while going through your divorce? Schedule a free consultation with one of our expert mediators to see how we can help.