An RSU (restricted stock unit) is an increasingly common form of compensation in California. Shares of stock are granted to an employee according to a vesting plan and distribution schedule. They pose a challenge in a divorce because the law concerning them is relatively unclear.
A previous article gave an overview of RSUs. It also addressed ways of characterizing RSUs that were granted during marriage but vest after the couple’s date of separation. By “characterizing,” I mean determining the proportion of each RSU to consider community property vs. separate property.
It’s important to understand that there is no single rule or formula for the characterization and division of an RSU in a divorce. In fact, the law allows courts to come up with a different solution for each different situation.
As noted in my previous article, a sensible approach is to:
- List out the RSUs and the vesting schedule.
- Make sure you fully understand them.
- Characterize each as separate or community property. If any are a mixture, work out for each such grant the share percentages that are separate and community.
- Value them.
- Negotiate how to divide them or who will receive them.
Characterizing an RSU
In general, California law says anything (including RSUs) earned during a marriage is community property. This is true whether or not the compensation or full vesting occurred during the marriage. An RSU earned before marriage or after the date of separation is separate property.
But sometimes they are earned both inside and outside of the period of the marriage.
The previous article addressed the situation of RSUs granted during the marriage which however vest after the date of separation.
This article addresses two other situations.
RSU Granted After Date of Separation
By default, these would be considered the separate property of the employee spouse.
However, it’s possible that the grant was viewed by the employer as a form of deferred compensation. And that the compensation is in whole or in part for service performed during the marriage. To the extent this is the case, the grant would be considered community property.
Of course, the employer’s intention at the time of the grant is often unclear. Often the intention was to provide an incentive for future performance. If so, the grant would be the separate property of the employee spouse. This is because the future performance would all be outside of the period of the marriage.
RSU Granted Before Marriage Which Vested During Marriage
These also may also be a mixture of separate and community property.
As explained in my previous article, California appellate case law has two “time rule” formulas. These were developed for cases in which an RSU grant occurred during marriage but vested after separation.
The logic behind these formulas could be applied to RSUs granted before marriage which vested during marriage.
The Hug case viewed the RSU grants as a form of deferred compensation.
Adapting the Hug formula, the fraction of the RSUs that could be considered separate property is:
(months between when the employee started work at the company and the date of marriage) divided by
(months between when the employee started work at the company and the RSU vesting date).
If, for example, the employee worked for the company prior to the marriage for 36 months and the RSUs didn’t vest until 12 months after marriage, 36 / (36+12) = 3/4 of them could be considered separate property.
The Nelson case viewed the RSU grants as primarily future incentives for performance.
Adapting the Nelson formula, the fraction of the RSUs that could be considered separate property is:
(months between when they were granted and the couple’s date of marriage)
divided by
(months between when they were granted and the date they vested).
If, for example, they were granted 12 months prior to the date of marriage and didn’t vest until 36 months after marriage, 12 / (12+36) = 1/4 of the RSUs could be considered separate property.
Summary
As should be clear, this is far from an exact science with predetermined outcomes.
Therefore, divorcing couples have plenty of room for negotiation when it comes to RSUs. It may be beneficial to have the assistance of a good mediator (and/or a Certified Divorce Financial Analyst).
