Posted in Firm News
Equity compensation has become a standard part of many employment packages, particularly in tech, finance, and executive roles. When divorce enters the picture, stock options and restricted stock units (RSUs) create unique challenges that go beyond traditional asset division. These benefits often represent significant value, but they’re not always straightforward to split.
Understanding Stock Options Vs RSUs
Stock options give employees the right to purchase company stock at a predetermined price. They typically vest over several years and have an expiration date. RSUs, on the other hand, represent actual shares of company stock that employees receive once vesting requirements are met. The distinction matters because courts treat them differently during property division. Stock options only have value if the current market price exceeds the exercise price. RSUs have inherent value as long as the company stock maintains worth. Both types of equity compensation usually come with vesting schedules that extend over multiple years, which complicates matters when a marriage ends before vesting completes.
Marital Vs Separate Property Classification
Maryland uses an equitable distribution system for dividing marital property. The first question courts ask about equity compensation is whether it counts as marital or separate property. The answer often depends on when the compensation was granted and what it rewards. If your employer granted stock options or RSUs during the marriage as compensation for work performed during the marriage, courts typically classify them as marital property. This holds true even if vesting occurs after separation or divorce. The situation becomes murkier when grants reward both past and future performance or when they’re designed to retain employees for years ahead.
The Time Rule Formula
Maryland courts frequently apply the “time rule” to determine what portion of unvested equity compensation qualifies as marital property. This formula looks at:
- The grant date
- The vesting date
- The separation date
The calculation divides the time from grant to separation by the total time from grant to vesting. If you received RSUs in January 2020 that vest in January 2024, and you separated in January 2022, roughly half would be considered marital property under this approach.
Valuation Challenges
Valuing stock options requires more than checking the current stock price. Courts consider the exercise price, the likelihood of vesting, company performance, and market volatility. Public company stock is easier to value than private company equity, where determining fair market value might require professional appraisals. Timing also affects valuation. Should courts value options at separation, at the divorce decree, or at some other point? Maryland law generally favors valuation at the time of the divorce decree, but exceptions exist. A Bethesda high asset divorce lawyer can explain how timing impacts your specific situation.
Tax Implications You Can’t Ignore
Dividing equity compensation triggers tax consequences that reduce the actual value received. When you exercise stock options, you typically owe ordinary income tax on the difference between the exercise price and the market value. RSUs get taxed as ordinary income when they vest. Capital gains taxes apply when you eventually sell the stock. These tax obligations affect how much each spouse actually receives from the division. Smart settlement negotiations account for these costs rather than treating pre-tax and post-tax values as equivalent.
Division Methods
Courts have several options for dividing equity compensation:
- Immediate offset: One spouse keeps the equity while the other receives assets of equivalent value
- Deferred distribution: Spouses split the equity when it vests and can be sold
- Constructive trust: One spouse holds the equity but owes the other a percentage when it’s exercised or vests
Each method has advantages and drawbacks. Immediate offset provides closure but requires other assets to balance. Deferred distribution maintains fairness if stock values change, but keeps spouses financially connected. The right approach depends on your specific circumstances, available assets, and risk tolerance. Talking to A Bethesda high asset divorce lawyer can help you determine the approach that’s right for you.
Protecting Your Interests
Documentation matters enormously in these cases. Gather all grant agreements, vesting schedules, company stock plans, and correspondence about your equity compensation. Financial statements showing how much equity you currently hold provide the foundation for fair division. Don’t assume your spouse will accurately disclose their equity compensation. Some people conveniently forget about stock options granted years ago or downplay the value of RSUs from employers. Dividing equity compensation requires both legal knowledge and financial understanding. The attorneys at Fait & DiLima, LLP work with financial professionals to make sure your equity compensation gets properly valued and fairly divided. Contact our firm to discuss how your stock options or RSUs should be handled in your divorce proceedings.
