For many professionals in Massachusetts, particularly in technology, finance, and biotech, compensation often extends well beyond salary and annual bonuses. Restricted Stock Units (RSUs) and stock options frequently make up a substantial share of overall earnings. Dividing these assets in a divorce can be significantly more complicated than splitting a bank account. To make informed decisions, it’s important to understand how these assets are valued, divided, and taxed.
How RSUs and Stock Options Work
RSUs and stock options are forms of equity compensation. RSUs grant company shares once certain conditions, usually tied to continued employment or performance, are met. Stock options give the right to buy company stock at a set price, often called the exercise or strike price.
A common complication is that many stock awards are unvested during divorce proceedings, leaving the right to the shares or options still contingent on future employment or performance.
Valuation Methods for Unvested Equity
Massachusetts law treats unvested equity as marital property if it was granted during the marriage for work performed during the marriage. Valuing it is tricky because its future worth can be uncertain. Two common approaches are:
- Intrinsic Value Method – This method values the equity based on the difference between the current stock price and the exercise price (for options) or the current market price (for RSUs). For unvested awards, the value is often reduced to reflect the uncertainty of vesting.
- Deferred Distribution Method – Instead of guessing the value now, the court orders the division to happen when the equity vests. The actual value at that time determines what each spouse receives.
Both methods aim to account for the possibility that the stock’s value may rise or fall, or that the employee may leave the company before vesting.
Common Division Approaches
While each divorce settlement is unique, the most common ways to divide RSUs and stock options in Massachusetts include:
- Deferred Division – The employee spouse holds the equity until it vests and then transfers the agreed portion to the other spouse.
- Immediate Offset – One spouse keeps the equity, while the other receives an offsetting asset, such as more cash from bank accounts or a greater share of other marital property.
- Hybrid Approach – Part of the equity is offset immediately, and part is divided when it vests.
Tax Consequences to Consider
Equity awards come with tax implications that should be factored into any division agreement. Key considerations include:
- RSUs – When RSUs vest, the fair market value is generally taxed as ordinary income. The employee spouse will owe the taxes, even if a portion of the shares goes to the other spouse.
- Stock Options – For non-qualified stock options (NSOs), the “spread” between the exercise price and market value at exercise is taxed as ordinary income.
- Transfers Between Spouses – In many cases, transferring equity in connection with a divorce is not a taxable event, but taxes may be due when the equity is sold or exercised later.
Understanding which spouse will be responsible for future taxes and ensuring the settlement accounts for it can prevent unpleasant surprises.
Planning for Forfeiture and Vesting Changes
Unvested equity can be lost if the employee spouse leaves the company or is terminated before the vesting date. Similarly, some companies accelerate vesting in certain situations, like a merger or acquisition.
To reduce uncertainty, divorce agreements should spell out what happens if the equity is forfeited or vests earlier than expected, including:
- Specifying what happens if the equity never vests
- Determining how accelerated vesting will be handled
- Clarifying who controls decisions about exercising options or selling shares
These contingencies can prevent disputes and ensure both parties understand what will happen if circumstances change.
The Role of a Divorce Attorney
Equity compensation can be one of the most valuable and complicated assets to divide in a Massachusetts divorce. The stakes are high, and the rules can be different from one company to another. Working with a divorce attorney familiar with equity compensation can help ensure a fair division and minimize the risk of tax or valuation issues.
FAQs: Dividing RSUs and Stock Options in Massachusetts Divorce
Are unvested RSUs marital property in Massachusetts?
Yes, if the RSUs were granted during the marriage for work performed during the marriage, they are generally considered marital property. The court may still account for vesting conditions when dividing them.
Who pays the taxes on RSUs after divorce?
Typically, the employee spouse pays taxes when the RSUs vest, even if some of the shares go to the other spouse. The settlement should account for this tax responsibility.
Can stock options be split before they vest?
Often, they are not split until they vest. Many divorce agreements use a deferred division method, so the actual value is determined at the time of vesting.
What happens if the equity never vests?
The divorce agreement should specify that if the equity is forfeited, such as if the employee leaves the company, the non-employee spouse will not receive that portion.
Talk to Seder Law About Dividing RSUs and Stock Options
If you are facing divorce in Worcester, Westborough, or anywhere in Massachusetts, and you or your spouse holds RSUs or stock options, the decisions you make now can affect your financial future for years to come. At Seder Law, we can help you evaluate your equity awards, explain your options, and work toward a fair outcome. Contact us today to schedule a consultation.