If you or your spouse are granted stock options or restricted stock units (RSUs) as part of your compensation, it’s crucial to make well-informed decisions to safeguard your interests in these assets during a divorce. The process can be intricate, with complexity levels varying based on the type of stock award, acquisition timing, and vesting date.
At Sullivan Law & Associates, our Orange County family lawyers are highly experienced in all aspects of divorce. We can help you make informed decisions with your best interests in mind. Contact our office today at (949) 590-8100 to schedule your 1 on 1 consultation and to learn more about how we can help.
Stock Options vs. RSUs: What You Need To Know
RSUs share a close connection with stock options, yet it is crucial to grasp the nuanced yet significant distinctions separating the two.
- A stock option is a contractual agreement ensuring the holder’s ability to buy a company’s stock at a set price after a specified date. This is especially appealing for employees in expanding firms, as the stock’s future value could surpass its current worth significantly.
- An RSU represents a commitment to provide the holder with company stock in the future, without requiring payment upfront. Once vested, RSUs become taxable at ordinary income tax rates. Often utilized as incentives, RSUs serve as “golden handcuffs” to retain top-performing employees within an organization.
How Are Restricted Stock Units (RSUs) Handled in California Divorce Cases?
California operates under the “community property” law, where assets acquired during marriage are jointly owned. When a couple divorces, RSUs (Restricted Stock Units) become a pivotal issue. If RSUs were granted and vested during the marriage, the employee’s spouse can either sell the stock and split the proceeds or retain it and share its current value.
However, RSUs may not vest until after the date of separation, creating complexities in divorce proceedings in California. It is crucial to address RSUs during divorce unless stipulated in the couple’s prenuptial agreement.
- One approach involves evaluating the RSUs that are not yet vested by the separation date and providing an equivalent value to the non-employee spouse.
- Alternatively, you could opt to defer the division of RSUs until after they have vested post-divorce, distributing them based on their market value at that future time.
- A third possibility is to utilize one of the formulas designed for the division of stock options and RSUs in California, elaborated upon in more detail below.
Hug Formula vs Nelson Formula: Which Is Best?
Two primary formulas, the Hug formula, and the Nelson formula, have been established by California courts for the division of RSUs in divorce cases. Before delving into these formulas, let’s first clarify some key terminology:
- HD: Hire date (employee’s spouse’s start date at the company)
- SD: Separation date (spouses’ separation date)
- GD: Grant date (RSUs granted to the employee spouse)
- VD: Vesting date (RSUs vesting date)
- n: Number of vested shares
The Hug Formula
The Hug formula is typically utilized in cases where RSUs were granted as a recognition of past achievements or as a strategic move to entice the employee’s spouse. This calculation method is as follows:
(HD – SD)/(HD – VD) * n
The Nelson Formula
The Nelson formula is utilized when RSUs were meant to motivate the employee’s spouse to remain with the company or excel in the future. The calculation is as follows:
employee’s(GD – SD)/(GD – VD) * n
If you’re wondering how to split stocks in a divorce, understanding the allocation of RSUs in California divorce cases can be complex, often necessitating expert guidance. For further insight on RSUs in California divorce cases, reach out to the seasoned divorce attorneys at Sullivan Law & Associates. Our extensive experience in navigating these intricate financial instruments within property division matters can provide invaluable assistance.
Key Factors to Keep in Mind for Executives in Early-Stage Companies
Stock options and RSUs are increasingly common forms of compensation for company owners and executives, particularly in early-stage companies and the IT sector. To attract top talent, these companies often offer stock options and RSUs alongside competitive salaries and benefits.
If you or your spouse received stock options or RSUs from an early-stage company, it’s crucial to address this early in divorce proceedings with your attorney. Developing a strategic approach to safeguard your post-divorce rights is essential, including careful consideration of how these assets factor into your marital estate.
Are Stock Options Marital Property?
California operates under community property laws. In divorces within California, individuals usually retain 100% ownership of their designated separate property, encompassing:
- Anything you owned or earned before your marriage, and
- Any individual gifts or inheritances you get during your marriage.
During marriage, earnings are considered community property and are divided equally if the spouses separate. The date of separation is crucial, as it signifies the end of the marriage when one spouse decides it’s over and communicates this to the other.
However, vested interests are treated differently. In divorce cases involving unvested stocks, stock options, or RSUs, California law follows a time rule. Stocks granted before marriage but vested during marriage, or those granted during marriage but vesting after separation, are divided between community and separate property based on the marriage duration and employment period. Stock options obtained post-separation are generally classified as separate property.
Consult Our Experienced Divorce Attorneys to Explore Your Options
If you have inquiries regarding safeguarding your rights to stock options or RSUs during a California divorce, we encourage you to reach out to Sullivan Law & Associates today. To confidentially consult with one of our skilled Orange County high-net-worth divorce attorneys, please call (949) 590-8100 or schedule a consultation online today.