If you are an executive paid partly in restricted stock units, stock options or deferred compensation, the most useful thing you can bring to a first consultation with a divorce attorney is paper. Bring the grant documents. Bring the award letters. Those documents answer the questions that decide how much of your equity is marital.
In New York, RSUs granted during the marriage as a reward for past work are generally marital, much like a bonus. RSUs granted as an incentive for future work are often divided with the time-based formula from DeJesus v. DeJesus, so only part of each vesting tranche is marital. Your grant documents tell you which kind you have.
What documents should you gather?
Before you meet with an attorney, pull together:
- The grant or award agreement for each grant
- The equity plan the grants were issued under
- The vesting schedule, including any performance conditions
- Statements from the plan administrator showing what has vested, what was withheld for taxes and what was sold
- Pay stubs and W-2s showing the income recognized at each vesting
- Any offer letter or retention letter that mentions the grant
When was the grant made, and what was it for?
This is the first question I ask, and the answer drives everything else. Look at the grant date, then look at what the grant was meant to reward. If the award letter ties the units to results in a year that has already ended, the grant behaves much like a bonus. When that grant was made during the marriage for work performed during the marriage, but vests after the date of marriage, it may still all be marital.
If the grant was meant to keep you at the company, the golden handcuffs kind, the analysis shifts. Those units reward service that continues after the marital period ends, so only a portion of the units are marital.
Many grants are unclear. Annual refresh grants, for example, are sometimes described as a reward for last year’s results and sometimes as retention. Offer letters and compensation committee language can help settle what a grant was actually for.
How does the DeJesus formula work?
In DeJesus v. DeJesus, decided by New York’s Court of Appeals in 1997, the court approved a time-based formula for stock awarded as an incentive for future services. In general terms, the marital share of each tranche is a fraction. The numerator is the time from the grant date to the cutoff date. The denominator is the time from the grant date to the vesting date.
Your cutoff date matters a great deal. In New York the marital period generally ends when the divorce action is started, or on a date the two of you agree to. Every month that passes before that date can move more of your unvested equity into the marital column. I explain this in more detail in my post on money you earn after you file.
I have also written several articles on the DeJesus formula, including one in the New York Law Journal, and my blog has a DeJesus calculator you can use to see how the math works.
How are the shares paid when they vest?
Read how the award settles. Most RSUs deliver shares at vesting, and the company withholds some of those shares to cover income tax. Some plans pay cash instead, and some let you defer delivery. Each of these changes what is actually available to divide and when.
RSUs are taxed as ordinary income when they vest, based on the value of the shares that day. A unit’s value on paper is a pre-tax number. If one spouse takes cash and the other keeps unvested RSUs counted at face value, the spouse with the equity may be carrying a tax bill the other one never sees, which is why you must account for the taxes if you are keeping the stock and paying out the spouse.
Can you transfer RSUs to your spouse in a divorce?
Usually you cannot. Most plans prohibit transferring unvested RSUs. Instead, the employee spouse holds the marital share in what is called a constructive trust for the other spouse, and delivers those shares, or their value, if and when the units vest. The settlement agreement needs to spell out how that works, including:
- Which tranches are shared, and the marital percentage for each
- Who pays the tax on the shared shares, and how withholding is credited
- What happens if the employee leaves the company and unvested units are forfeited
- What happens on a merger, an acceleration or a stock split
- How and when the other spouse receives the shares or the cash
An if-and-when arrangement ties both of you to the stock price and to the employee’s job for years. Some couples prefer a buyout at a negotiated present value instead. The right choice depends on the company, the vesting schedule and how much risk each of you is willing to carry. It also must consider the tax issues.
Before you negotiate
In many high net worth divorces, executive compensation may be one of the largest assets and one of the least understood. Before you agree to anything, know when each grant was made, what it was for, how it pays out and what the tax will be. Work with your attorney and a trusted professional such as a forensic accountant, and if anything is unclear, go back and ask again.
I also cover these questions in a short video on restricted stock units.
If you hold RSUs, stock options or deferred compensation and are facing a divorce, contact an experienced attorney, and take a look at my blog at lisazeiderman.com for more on executive compensation and the DeJesus formula.
The information in this article is for general educational purposes only and does not constitute legal advice. Please consult a qualified New York divorce attorney regarding your specific circumstances.