Overview of Unvested RSU Division

One of the most significant assets parties have in CA is the value of their RSUs both vested as shares and unvested as units granted but not yet vested according to the Grant Schedule. RSUs are not immediate payouts but are instead deferred compensation that vests over time. This is a crucial factor in classifying them as community or marital assets.

When RSUs are received as part of an employment package, it is typically not based on your past performance in order to secure you as a new hire (unless you are a C-suite executive). Typically it is a awarded as a future financial benefit for your current work. Since this work happens during the marriage, the deferred compensation—the RSUs-is commonly classified as community property. But the community interest is not necessarily 100% as explained below in the case of unvested RSUs.

Typically, if the grant was:

1.     Awarded before the marriage but vested after the date of marriage, during the marriage, there is a community interest to the award

2.     Awarded during the marriage but vested during the marriage, the entire amount is completely community property

3.     Awarded during the marriage and but vests after the Date of Separation (DOS), there is both a community interest and separate property interest in the shares

4.     Awarded after the Date of Separation is typically separate property

Implied in the determination of the community component of RSUs is the role of the non-employee spouse. Courts often consider the “indirect efforts” of the spouse, acknowledging that their emotional or logistical support contributed to the career success of the employee spouse.

There are several factors that are considered in determining the amount that Is community versus separate property and this primarily impacts #3 above, the allocation and valuation of unvested RSUs during divorce.

These factors include:

·      Grant Date

·      Date of Separation

·      Vesting Date

A rule of thumb is that the further in the future that the stock vests AFTER the date of separation, the lower the community interest in the stock. However, this is impacted by the date the grant was awarded.

Unvested RSUs may be managed in the following ways:

1.     Payment of the RSUs as they vest with consideration of the tax implications for the employee. The estimated tax can reduce the number of net shares given to the non-employee or the employee may 1099 the non-employee for the taxes applied to the non-employee’s share and reduce their own tax liability by the amount paid or due.

2.     Conduct a valuation of the number of shares that are unvested and valued at the current stock price (assuming it is a public company or at the 409A valuation if private).

This is in line with CA Family Code which states that assets should be valued as of the “time of trial” which in mediation cases would be at or around the date of settlement. The parties in mediation may choose the date to value all or some assets and this could involve multiple valuation methodologies or dates depending on the particular asset.

For example, the most recent end of month statement closest to settlement may be used for non-retirement assets, but the actual value of the retirement account at the time the Plan Administrator receives the Qualified Domestic Relations Order (QDRO) for qualified accounts may be agreed upon. For specific stock pricing, a particular date may be chosen and all divisions based on that value or specific agreed upon price of a public or private company stock may be used. As you can see, the options are plentiful and the

Once the valuation is known, an offset may be made using other assets in place of the amount owed for the “expected or agreed upon value” of these unvested units.  

This option eliminates the need to continue to be entangled post-divorce with the payment to the non-employee spouse of the community property component of the RSUs that vest.

Record-keeping post-divorce

Another consideration is record-keeping of the NEWLY awarded grants that vest vs. those units that were community property. And this is further complicated if there is child support and spousal support involved as a distinction should be made for no double counting of community asset division with support paid on income above base salary.

As you can see, the management post-divorce of RSUs may be more involved than initially meets the eye. The employee will hold the RSUs in a “constructive trust” which is not a formerly drafted trust but rather an instrument cited in the Martial Settlement Agreement or divorce decree that requires the employee to have a fiduciary duty to the caretaking of the community portion of these units through the payment of the appropriate, requisite amounts to the non-employee spouse as the shares vest post-divorce. Companies typically do not allow re-assignment of shares to anyone other than the employee.

RSUs that have not yet vested are not liquid assets. Their valuation fluctuates with the stock price of 409(A) valuation. Holding them in constructive trust awaiting their vesting date is a restriction for both parties since the asset valuations may never be realized depending upon company-specific, economy-specific, market-specific or employee-specific events.

Special Conditions and Performance Milestones

It is important to review the Grant Award Letters to determine if there are any special conditions such as performance milestones or company-specific events (such as IPOs or acquisitions) that trigger vesting. These can add another layer of complexity to the characterization process (as community or separate property) and to the division process. Full disclosure of any such special conditions is warranted for accurate assessment of the characterization of the unvested RSUs.

Other Concerns

If the offset method is chosen to divide the community interest in the unvested RSUs, the employee should note the risk involved in paying upfront for the possibility that the unvested shares are not realized. There is no guarantee that the employee will be employed at the company for the unvested shares to finally vest according to the schedule.

If the shares are valued as of current value (or any other agreed-upon price) and then offset with other assets, it may be that the employee will not realize his or her share of the unvested amounts. Yet the community interest of the non-employee has already been offset.

All RSUs are typically forfeited upon termination from a company. Special rules are in place at most company when there is a pending retirement with unvested units and for mergers and acquisitions. However, there is a risk involved with an early payout of unvested units that should not be disregarded.

Payment of Unvested Units

The unvested amounts to be paid in the future may be payable in cash or in-kind. If payable in-kind, once the units vest, the shares may be transferred to the non-employee spouse. The easiest way to facilitate such a transfer is to open an account for the non-employee at the same custodian as the RSUs are held. This greatly facilitates the transfer of the designated shares as they occur. The company restrictions on the right to transfer RSUs is no longer an issue once the units vest.

Note:  This article is for informational purposes only and is not intended to provide either tax or legal advice.  Please contact your attorney or accountant and rely on their independent research and advice for these matters.