How Are Restricted Stock Units (RSUs) Split in a Divorce?

Some assets are easily distributed as part of a divorce. A checking account - for example - can simply be split down the middle. Restricted Stock Units ("RSUs") are typically benefits provided by an employer to encourage future employment or praise past performance. These RSUs are much more complicated than the average bank account but – just like your standard savings account - need to be accounted for while distributing property in a Washington divorce.

Past Performance or Future Performance - the First Question!

Most assets acquired during a marriage until separation are considered community assets. The first question to consider for RSUs is whether the award was made to encourage future performance or praise past performance. Most often, a past performance award is seen at the outset of employment. Perhaps your employer tempted you to switch jobs with a package of benefits including an award of stock units. Oppositely, future performance RSUs tend to be earned over time requiring that you stick with the current company to continue receiving the awards.

Community Property or Separate Property - the Second Question!

Past performance RSUs will be considered community property if the performance being praised was completed during the marriage. This is typically a straight-forward analysis. You can think of these awards as delayed compensation for great performance during a certain period. Most often, when the employer made the award, the main question is were you married at the time (or immediately beforehand)?

Community property units for future performance are pro-rated based upon the amount of time the RSUs were vesting during the marriage. This analysis is a bit more complicated, and expert forensic analysists are often utilized to perform a thorough review. Fortunately, the Supreme Court gave guidance in 1995 in the case In re Marriage of Short. The Court held that a "time rule" should apply to dividing future performance RSUs.

The Time Rule for Awarding Future Unvested Stock Options

Once you know there are unvested, future performance stock options to distribute, you must then apply the Short time rule to determine the community portion of RSUs. Here's an example. Jamie works for Microsoft and was awarded 100 stock units on January 1, 2020. Jamie and James separated on January 1, 2021 and are in the midst of a divorce. Jamie’s stock award is set to vest on January 1, 2022. The couple was married for 50% of the vesting time. Therefore, 50 RSUs are community property and 50 RSUs are Jamie’s separate property.

Once you figure out the community share of the stock units, that amount is then often divided further based on agreement or court order. If the court awards each spouse 50% of the community property then James would get 25 shares and Jamie would get 75 shares (50 of which were her separate property). These shares might be split in the future by Qualified Domestic Relations Order (QDRO). Alternatively, the RSUs might be given a monetary price based on the current market value. Either way, under a perfect analysis, tax offsets may also be taken.

In the end, distribution of restricted stock units is a complicated endeavor. The example above was a simple analysis of a single stock award. Often, employees might have dozens of small stock awards spanning several years that need to be interpreted. Experts are used in cases that approach trial, but experienced family law attorneys will often be able to provide a detailed breakdown of community property. The litigators at the law office of Magnuson Lowell PS understand the law and how to apply it. Call today for a free case evaluation.

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