During a divorce, either you and your spouse will have to divide your assets or you will have to let a court decide how to divide them. The process can be confusing and seem complicated. Unless you have a prenuptial or postnuptial agreement that clearly specifies who gets what in a divorce, you’ll have to let a judge decide.
You and your spouse may disagree about who is entitled to what, and you may disagree about whether certain property is community property or separate property. It’s not always as straightforward as you might think, and these distinctions are important because anything deemed community property gets divided between the parties (not necessarily 50/50 though).
Understanding Community Property vs. Separate Property
In California, which is a community property state, the general rule is that any and all assets and property earned or acquired by either spouse during the marriage is considered equally owned by both spouses and is, therefore, community property.
The other type of property is separate property, which refers to property acquired by one spouse either before the marriage or outside the marriage (for example, an inheritance or gift given specifically to one person might be considered separate property). It also includes property earned or acquired after final separation.
Stock Options and Restricted Stock Units – Who Gets Them?
One type of asset that can be confusing and that couples often and understandably disagree about is stock options. The reason I say potential confusion and conflict is understandable is because as of this writing, California does not have one standard formula for determining division of a specific type of stock option called restricted stock units or RSUs.
Stock options give employees or other parties (such as consultants, contractors, and investors) the opportunity to purchase stock in a company at a point in the future at a pre-determined price. Stock options are a form of compensation, but divorce courts don’t necessarily treat them the same way they do regular income, salary, or bonuses.
Restricted stock units (RSUs) are a specific kind of compensation where the employee does not purchase stock but instead is granted stock that vests (has value) later and after certain conditions are met, for example, after the person works a certain number of years. Sometimes RSUs are given to an employee as a way of motivating or incentivizing them to perform. Sometimes they’re given in lieu of a higher salary upfront if, say, the company is growing and wants to get top talent at a bargain price.
Where the confusion often lies during a divorce is when one party is granted RSUs during the marriage but the RSUs don’t vest until after separation. In this case, the party who is the employee often feels entitled to 100% of the value of the RSUs—after all, it is only because they worked and met the requirements that the RSUs vested and have any value at all. However, the other party may feel entitled to part of the value in the same way they feel entitled to other earnings during the marriage—the RSUs were granted during the marriage, so aren’t they community property even if they vested after separation, or won’t vest until further down the road?
If only it were as simple as one or the other! But the courts use their discretion in dividing RSUs just as they do with other disputed property–which is why you’re wise to have a prenuptial agreement when you marry and continue to update it when there are significant financial changes throughout your marriage (this is called a postnuptial agreement).
Two Ways California Courts Might Look at Dividing RSUs
There are two California Appellate Cases that judges typically refer to for guidance in deciding how to divide RSUs in a divorce: Hug and Nelson.
Under the Hug Rule, RSUs are thought of as deferred compensation, so the value is calculated with a formula that is based on the employee’s start date with the company.
Under the Nelson Rule, RSUs are thought of as future incentive for performance, so the value is calculated with a formula based on the date the RSUs were granted to the employee (which could be on or near the start date but could also be at a much later time).
Without getting into the nitty-gritty of the formulas, the point is that there is no ONE hard and fast rule that all courts use consistently in dividing the value of RSUs between divorcing parties.
This is where a prenuptial or postnuptial agreement can save everyone a lot of time, expense, and aggravation.
Also, be aware that there is other relevant case law, and laws do change, so in a mediation or collaborative divorce we hire neutral financial experts to analyze these assets and give us a formal report on the best method of division.
You Don’t Have to Let the Courts Decide
If you don’t have a prenuptial or postnuptial agreement and you’re facing a divorce where there are potentially tricky aspects (like RSUs) that you don’t want a judge to decide, and if you and your soon-to-be ex-spouse can work civilly and cooperatively toward a compromise, I recommend you look into a mediated divorce or a collaborative divorce. With these out-of-court divorce options, the two of you will work with either a mediator or with a collaborative team to make decisions that both of you can live with.
I find that with everything from complicated issues like RSUs to emotionally charged issues like child custody, couples who use mediation or a collaborative process are far happier with the outcomes. These processes keep the control within the couple and out of the hands of a judge who doesn’t know you and your history. You’re also likely to finalize your agreement more quickly and with less expense than when you go into the process as adversaries fighting for the lion’s share of property.
Explore your no-court divorce options and the prenuptial process in Santa Rosa and Sonoma County and schedule a confidential consultation with divorce lawyer Jeanne Browne. With more than 30 years of experience helping couples divorce without court through mediation and collaborative practice, she will give you compassionate legal advice on your issues related to family law, divorce, and prenuptial/postnuptial agreements. Click here to schedule a meeting.
Please Note: Articles posted on this website are for general information purposes only and are not to be considered legal advice. Every situation is unique and we recommend you reach out for a private conversation about your specific circumstances and concerns by booking a consultation.