Splitting Stock options in A Divorce

It is very common that you receive equity compensation if you are in Bay Area. You receive restricted stocks, stock options, performance shares, etc. as part of non-cash pay.  California is a Community Property State so if you are getting divorce, you are required to split the stocks/stock options with your spouse if they are acquired during the period of your marriage. This article will provide a quick overview of how splitting stocks works during divorce proceedings.

Restricted stock units (RSUs) are a way of your employer can grant you company shares. RSUs are restricted as they have a vesting schedule and won’t be released until you meet the time or performance goals. Two formulas are frequently used in CA when dividing the RSUs in divorce: the Hug Formula and the Nelson Formula.

• The Hug Formula is generally applied when RSUs are granted for past performance.
• The Nelson Formula is generally applied when RSUs are awarded for future performance as an incentive.

RSUs granted and vested during your marriage are community property so they should be split equally between spouses. RSUs granted and vested after your separation are separate properties so they shouldn’t be divided. RSUs granted in the marriage but vested after the separation or RSUs granted before the marriage but vest during the marriage will have both community properties and separate properties. After the RSUs allocations are determined, you may consider if you would like to divide the shares or buy out the shares from the non-employee spouse.

Stock options are not considered owned until you exercise. However, stock options granted and vested during the marriage are usually deemed as marital property. Same as RSUs, different formulas are used for stock options depending on if the stock options are awarded for the past of future service. The stock options are generally non-transferrable so the employee spouse should exercise on behalf of the non-employee spouse for his/her portion. The non-employee spouse should compensate the employee spouse for any exercising costs and taxes. The terms should be clearly laid out in the separation agreement.

If you need assistance with equity division in the divorce and are interested to know the tax implications, please contact Dimov Tax Associates at the contact form below.