Divorce can be complex in New York particularly when you are dealing with dividing assets such as restricted stock units and/or stock options. That is why it is imperative that if your income includes stock options, restricted stock units (RSUs) or deferred compensation, you become intimately familiar with the DeJesus formula. Getting a grasp of how this formula works and when or when not to utilize it can have a substantial impact on the financial aspects and overall outcome of your divorce.
Essentially, the DeJesus formula aids in calculating what portion of RSUs, stock options and deferred compensation are marital property and what portion are separate property. The DeJesus formula may affect how millions of dollars are distributed during a divorce. It is a core principle of New York’s equitable distribution law as applied to employee executive compensation, specifically when that executive compensation is awarded as an incentive to an employee to continue their employment.
What Is the DeJesus Formula?
The DeJesus formula emanates from the famous New York case, DeJesus v. DeJesus, which set forth a method to divide stock options, RSUs and other forms of deferred compensation when a spouse is granted the RSUs during the marriage but does not vest into the stock until after the commencement of a divorce action or legal separation.
In plain language, the formula is utilized to determine: Which portion of an award was earned during the marriage and should be equitably divided, and which portion was earned after the marriage and should remain the employee’s sole and separate property?
Concepts to consider include but are not limited to the following: (1) was the executive compensation given as a bonus or as an alternative to fixed salary; (2) whether the value or quantity of the employee’s shares is tied to future work to be performed or based upon work performed in the past; and (3) whether the stock plan is being utilized to attract key personnel away from competing companies.
Before you calculate: remember you only use the DeJesus formula when the compensation is awarded for future performance. Incentive equals DeJesus.
The calculation examines:
- The length of time between the grant date and the vesting dates (remember there may be several vesting dates)
- The length of time the couple was married during that period before the divorce action commenced
Like so much in life, it is all about the timing. For example, if a spouse received RSUs midway through the marriage that vest over a four year period, the DeJesus formula helps isolate what fraction of that four-year period overlaps with the marriage. Only that fraction is likely subject to equitable division.
Why It Matters in High-Net-Worth Divorce
In my divorce practice, I see this issue arise frequently among my executive, banker, and tech clients. Stock options and RSUs can make up the largest component of their total compensation. While their base may be a fixed number, the deferred compensation can vary from year to year based upon performance. The question is whether the performance was in the past or will be in the future.
For many clients, the demarcation of separate versus marital property as applied to stock options, RSUs and deferred compensation can make a difference of keeping hundreds of thousands or even millions of dollars. If you or your spouse work in finance or at a publicly traded company, these deferred assets are likely on the table. Understanding how the DeJesus formula applies can help you prepare long before settlement discussions begin.
Now remember, it is all about timing. The fact is that if you want more of your RSUs to be your separate property and you have already decided to divorce, the sooner you file for divorce, the more likely it is that you will keep more RSUs as your separate property. It is also imperative that you remember to tax impact if you are creating any buyout for the marital component.
Why is the Formula Fair?
The formula mathematically considers the work performed during the marriage and work to be performed after the divorce action is filed. While it recognizes that marriage is a financial partnership, it also recognizes individual efforts and work.
The person who earned the award after the divorce action commenced should be credited with such award as separate property. At the same time, a spouse who supported the career of the titled spouse during the marriage should still be able to share in the compensation that was earned during the marriage. The DeJesus formula applies numbers to a formula based upon fairness.
How Will New York Courts Utilize DeJesus?
Courts in New York continue to use the DeJesus formula as a foundation but then must still equitably divide the marital portion based upon the various factors considered in equitable distribution. Factors such as age, health, indirect and direct efforts and various other considerations are all considered as they apply to equitable distribution.
That means every case is fact intensive and the facts matter. The court’s goal is to make a fair distribution of marital assets.
Planning Ahead: What You Can Do
If you are starting a divorce and your compensation includes RSUs, stock options, or deferred bonuses:
- Gather complete records of all award and grant documents and vesting schedules.
- Understand the reason for the award. Was it for past work or to incentivize you to remain at the company, i.e. golden handcuffs?
- Work with a seasoned financial professional who can help you distinguish between the marital and separate property components of each award.
- Consult a New York attorney who is knowledgeable with executive compensation, the DeJesus Formula and executive compensation.
I encourage clients to use planning tools early in the process. Even a basic calculator or timeline chart can help clarify what is marital versus separate so that you can approach your divorce prepared and ready to negotiate.
Beyond the Spreadsheets
Dividing compensation is not just about the numbers. It is about transparency, trust, and preparation. The DeJesus formula is a tool that can bring certainty and predictability.
If your divorce involves complex compensation or stock-based income, understanding this formula could be one of the most important financial steps you take.
Lisa Zeiderman, Esq.
Managing Partner, Divorce and Family Law Attorney, New York