In divorce cases where one spouse works for a large company, stock options and Restricted Stock Units (RSUs) are common assets that must be divided. However, separating these complex assets can be challenging as they are not the same and have different timing, value, and purpose. Stock options grant employees the right to purchase company stock at a discounted price in the future, while RSUs are company shares awarded to employees that cannot be sold until certain conditions are met.
Determining the Separate or Community Property Interest in Stock Options and RSUs
The Texas Family Code allows for either all or a portion of stock options or RSUs to be considered as assets in a divorce, including both vested and unvested units. The primary challenge is deciding whether these assets are separate or community property. This decision can be complicated in cases where:
- A stock option or RSU was granted prior to marriage and vests during the marriage.
- A stock option or RSU was granted during the marriage but not yet vested at the time of divorce.
A formula from the Texas Family Code is used to determine the separate or community property interest in stock options or RSUs. The formula considers:
- The date the option or stock was granted
- The date of marriage
- Length of employment
- Duration of any vesting or restriction period.
It is essential to seek the assistance of an attorney as soon as possible to properly characterize these assets.
Dividing Stock Options and RSUs
There are various methods for dividing stock options and RSUs, including:
- Employee spouse buying out the other spouse’s share with other available funds.
- Employee holding the non-employee spouse’s shares in a constructive trust.
- In-kind division after vesting before exercising the options, if allowed by the company.
The best reference for characterizing or dividing stock options and RSUs is the option or share agreement from the employer. This document contains crucial information such as restrictions on the shares, different categories of shares, and what happens if the employee resigns or is terminated.
Valuing stock options and RSUs can be complex due to various factors such as company performance, grant date, and volatility. A common approach is a formula based on the number of shares and the stock value on a chosen date. Formal valuation methods or direct agreements between the parties can also be used.
It is important to note that when dividing stock options or unvested restricted stock awards, they are not transferred from one spouse to the other. Instead, they are held in trust by the employee spouse for the benefit of the other spouse. It is recommended to consider the tax impact when dividing these assets and seek the advice of a tax professional for the best strategies to equalize the tax effect.
Contact The Blacknall Firm
If you are facing a family law issue and need representation, contact the Blacknall Firm today. Our team of experienced family law attorneys is dedicated to helping our clients achieve the best possible outcome in their cases. Let us put our skills and knowledge to work for you.