RSUs: In Divorce, They're Easy to Hide (or Misunderstand)

A pair of wedding rings sit on top of stacks of cash.

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In today's corporate world, restricted stock units (RSUs) are becoming an increasingly popular form of employee compensation. More than 8 million employees in the United States hold RSUs, according to recent estimates. Tech companies and other industries commonly use these units to attract and retain talent by offering a stake in the company's future success.

Consequently, as RSUs become more prevalent, an increasing number of divorces now involve the complex task of splitting up these valuable and little-understood assets.

Understanding RSUs

RSUs are compensation given to employees in the form of company stock shares, granted over a vesting schedule. This means they become the employee's property over time, provided they remain with the company. Once vested, RSUs are considered income and are subject to taxes. Typically, how that works is that some of the shares that have vested are immediately sold to cover the taxes, and the balance of the shares then gets transferred to the employee as stock.

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One of the biggest challenges in divorce is that many spouses do not even know that their partner owns these RSUs, and this lack of awareness can lead to significant oversights in the division of assets. According to Lisa Zeiderman, managing partner at the Miller Zeiderman law firm in New York City, “RSUs can be a hidden asset in many divorces. It’s critical to investigate and gather all necessary documents to avoid missing out on these valuable assets, including but not limited to grant and award documents to understand whether the RSUs are for past performance or as an incentive for future performance.”

Jane and Mike's story

When Jane and Mike decided to end their marriage, Jane was fortunate to discover an award letter about Mike's RSUs early in the proceedings, but many other spouses may not be so lucky. Jane was thrust into the complex world of employee incentive compensation, as Mike, who had worked for a tech company for several years, held many RSUs. Jane quickly realized that understanding and valuing these RSUs was essential to ensuring she received a fair settlement.

Valuing RSUs

“Understanding the value of RSUs is more involved than checking an account statement or a paycheck. You must gather several essential documents, including the plan document, award letter, grant schedule and annual benefits statement,” says Alexandra Shepis, a Certified Divorce Financial Analyst and lead financial adviser at Francis Financial. In addition, Zeiderman points out, “Many people don’t realize that even unvested RSUs can be marital property if they were granted before or even after the divorce started.” For example, RSUs that were granted after a divorce started as a bonus for work performed during the marriage may indeed be marital property, according to Zeiderman, who is a matrimonial attorney. A close reading of both the award letters and the case law is imperative.

To negotiate the division of RSUs, you need to know their value. This requires understanding the grant date, number of RSUs granted, the vesting schedule and the stock price at the start of the divorce (usually referred to as the commencement date).

For example, if Mike had 10,000 RSUs granted at different times, Jane would need to determine the stock price at the beginning of the divorce to determine the total value of the vested and unvested RSUs.

Complications with job changes

Another intricacy arose with Mike's employment. Midway through their divorce proceedings, Mike changed jobs, forfeiting all his RSUs. His new employer compensated him with new RSUs to replace the ones he forfeited from his previous job. Mike claimed these new RSUs were not marital property, because they were granted after the couple separated, complicating the settlement process further.

"Mike argued that the RSUs from his new employer were post-separation assets," Jane recalls. "I was initially worried that I might lose out on a significant portion of what I considered marital assets. However, my lawyer was able to argue that the new employer was replacing the RSUs that were granted to him during our marriage. She said that I should not be penalized because Mike left his job."

So, the new RSUs replaced the marital RSUs forfeited when Mike left his previous job. "Even though the new RSUs were granted after the separation, they were compensatory for the marital RSUs. Therefore, they should still be considered marital property," says Zeiderman, who specializes in working with clients with complex assets, such as RSUs.

Common mistakes

Jane's journey, however, was not without mistakes. One significant error was initially failing to account for the tax implications of the RSUs. At first, Jane looked at the pretax value of the RSUs, which inflated their worth in the settlement negotiations. It wasn't until later that she realized the need to consider the substantial taxes that would reduce the net value of these assets.

"RSUs are taxed as ordinary income once they vest," says Shepis. "This tax burden can significantly reduce their value. Understanding the net value of RSUs after taxes is crucial when negotiating a divorce settlement."

Options for dividing RSUs

When dividing RSUs in a divorce, there are two main options. The first option is a buyout, where the employee spouse keeps the stock and buys out the other spouse's interest based on the current value. In this case, it's important to consider the taxes due when the RSUs vest so the employee spouse is not unfairly burdened.

The second option is a deferred division, where the employee spouse continues to hold the unvested stock in their name until the stock vests. The non-employee spouse receives their share of the vested stock at that time, after taxes. Keep in mind, though, that with a deferred division, the non-employee spouse is exposed to risk if the stock price drops or their former spouse leaves the company before the RSUs vest.

The bottom line in either division scenario is that understanding the taxes involved is essential for a fair settlement. Shepis shares that creating a pro forma tax return can help estimate the taxes due when the RSUs vest, providing a clearer picture of their net value after taxes.

Seeking professional guidance

Jane worked with Alexandra Shepis of Francis Financial, who specializes in divorce settlements involving RSUs, to navigate all of these complexities. Shepis helped her verify the valuation of the RSUs, ensure accurate tax calculations, and understand the long-term financial impact of the RSUs on her settlement. With her guidance and that of her lawyer, Jane could make informed decisions and secure a fair settlement.

Jane's story highlights the importance of understanding RSUs in divorce proceedings. She was able to ensure a fair and equitable settlement by thoroughly evaluating, dividing and calculating the taxes on these assets. If you are in a similar situation, seeking advice from financial specialists can help you navigate these intricacies and protect your financial future.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc., which she founded over 20 years ago. She is a Certified Financial Planner® (CFP®), Certified Divorce Financial Analyst® (CDFA®), as well as a Certified Estate and Trust Specialist (CES™), who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 25,000 women.