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California Division of Assets: How Restricted Stock Units Are Treated in a Divorce

Posted by Ahluwalia Law Professional Corporation | Apr 20, 2017 | 0 Comments

Restricted stock units (RSUs) are becoming a more common type of equity compensation for California employees. Instead of getting the stock immediately, they receive it according to the terms of a vesting plan and distribution schedule after remaining with the company for a certain amount of time or achieving performance milestones. Upon vesting, they are considered income and a percentage is withheld to pay taxes. The remaining shares go to the employee.

Any RSUs earned during a marriage are community property. Unless a prenuptial agreement specifies otherwise, they will be divided during a divorce action. In California, the division is not always straightforward, however. It all depends on when exactly they are vested and granted. Below are some general guidelines on how RSUs are divided in a divorce.

RSUs Granted and Vested During the Marriage

Division is comparatively straightforward for RSUs granted and vested during the marriage.

  • If the employee wants to keep any vested stock, both sides can consent to an equalization arrangement based on its current fair market value.
  • If both sides want to spit the stock according to its current value, half can be sold and provided to the spouse. In this instance, the potential exists for issues with capital gains taxes resulting from the sale.

RSUS Granted During the Marriage and Vested Afterwards

This arrangement makes division more complicated. One solution is to take RSUs that are non-vested at the time of divorce, value them, and give the spouse property of equal value. Another, which may work in an amicable divorce, is to wait until the RSUs finally vest and then divide them according to the current market value. The potential downside to this arrangement is that it is difficult to value RSUs before they are vested.

A third option is to treat these RSUs as partially earned marital assets and divide them according to the time rules created by the Hug and Nelson California Appellate Cases.

  • Hug formula: This equation takes the period of time between the granting of the RSU and end of the marriage and divides it by the period of time between when the employee started work at the company and when he or she vested the RSU. The result is multiplied by the number of vested shares and divided in two.
  • Nelson formula: This rule treats stock as future performance incentives. Its formula takes the time worked between the date the RSUs were granted and the date a couple separated and divides it by the date of the grant and vesting date. The community interest is then divided by the total number of RSU shares and divided in two.

RSUS Granted After Divorce for Performance During Marriage

This is one of the trickier situations to untangle. Employees who want to keep these RSUs can argue that the grants are ‘refreshers' and purely compensation for future work while their spouse can insist that they are a bonus specifically granted for past work.

If you are going through a California divorce and RSU division is part of the process, please call Ahluwalia Law P.C. today. Treatment of RSUs in a divorce action can be complicated, and your best option is to get experienced legal advice.

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