How Are Stock Options and RSUs Divided in an Indiana Divorce?

Introduction

Stock options and restricted stock units, often called RSUs, can be valuable parts of an employee’s pay. They can also be difficult to divide during a divorce. The answer may depend on when the award was granted, when it vested, and whether the employee could lose it. In more than 20 years of practicing law, I have learned that these benefits must be reviewed carefully. A grant statement may not tell the whole story.

KEY TAKEAWAYS

• Stock options and RSUs may be included in an Indiana divorce.
• Indiana generally includes property owned before the marriage in the marital estate.
• For stock options, vesting and forfeiture rules can be more important than the grant date.
• Options that were unvested when the divorce was filed generally are not marital property under Indiana law.
• Vested options and RSUs may require help from a financial or tax professional.
• An award may be divided now, offset with other property, or paid later when shares are received or sold.

What Are Stock Options and RSUs?

A stock option gives an employee the right to buy company stock at a set price. The employee may benefit if the stock’s market price rises above that price.

An RSU is a promise from an employer to give an employee shares of stock, or sometimes cash, after certain conditions are met. The employee usually must remain with the company for a set period.

Both types of awards commonly have a vesting schedule. An award is vested when the employee has earned the right to keep it. An unvested award can often be lost if the employee leaves the company.

Can Stock Options and RSUs Be Included in Property Division During a Divorce?

Yes. Vested stock options and RSUs can be part of the marital estate.

Indiana follows what is often called the one-pot rule. In general, property owned by either spouse when the divorce is filed goes into the marital estate. It may not matter which spouse earned the property or whose name appears on the account.

The starting point is an equal division. However, a court may order a different division after considering the facts of the marriage.

Stock options require special attention. The Indiana Court of Appeals has held that options which were not vested when the divorce petition was filed were not marital property, even though they vested before the final divorce hearing. Options that were vested, exercisable, and not subject to forfeiture may be included.

RSUs may require a similar review. The court may examine whether the employee had a fixed right to the shares when the divorce was filed or whether the award could still be lost.

Professional insight: One of the first steps should be obtaining the complete equity compensation records. A pay stub or account balance is rarely enough. The grant agreements, vesting schedules, plan rules, and employment records may change the result.

Does It Matter Whether the Options or RSUs Were Granted Before or During the Marriage?

Yes, but the grant date is not the only important date.

A marital estate in Indiana can include property that a spouse owned before the marriage. Therefore, a vested award granted before the marriage is not automatically protected from division.

The timing may still affect how the court divides the property. A spouse may argue that an unequal division is fair because the award was earned before the marriage. The court may consider when the property was acquired, each spouse’s contribution, and the parties’ financial situations.

An award granted during the marriage is not automatically divisible either. If an option or RSU remained unvested and could be lost when the divorce was filed, it may be treated as future compensation instead of marital property.

Dates That May Matter

• The date the award was granted;
• The date of the marriage;
• The date each part of the award vested;
• The date the divorce petition was filed;
• The date the award could be exercised or sold; and
• The date the employee received the shares or money.

The reason for the award can also matter. Some awards pay an employee for past work. Others are meant to keep the employee at the company in the future.

How Is the Value of Stock Options and RSUs Determined?

The value depends on the type of award and its restrictions.

For a vested stock option, a basic starting point is the difference between the current stock price and the option’s exercise price.

For example, assume an employee has the right to buy 1,000 shares for $20 each. If the shares are worth $35 each, the option has a basic value of $15 per share, or $15,000.

The real value may be affected by:

• The stock’s current price;
• The option’s exercise price and expiration date;
• Limits on selling or transferring the shares;
• Market changes and the risk that the employee will leave the company;
• Taxes; and
• Whether the company is privately held.

A vested RSU is often valued using the number of shares and the stock’s market price. Taxes and sale restrictions may reduce the amount the employee will actually receive.

Options in a private company can be much harder to value because there may be no public stock price. A financial expert may need to review the company’s value, recent sales, and the terms of the award.

Indiana courts have also recognized that taxes may affect the value of stock options. The tax issue should be supported with evidence rather than based on a guess.

Professional insight: A high account value does not always mean the employee can receive that amount today. I look beyond the number shown on the statement. The cost to exercise the options, taxes, company rules, and market risk must also be considered.

What Happens to Awards That Will Not Become Available Until After the Divorce?

This depends on whether the employee already had a vested and nonforfeitable right when the divorce was filed.

A vested award may be part of the marital estate even if the shares or money will be delivered later. The divorce agreement or court order should explain exactly what happens when the award becomes available.

Possible Ways to Divide a Future Payment

• Award the options or RSUs to the employee and give the other spouse more property;
• Require the employee to pay the other spouse when the shares are received;
• Divide the net proceeds when the shares are sold;
• Use an agreed value and complete a present buyout; or
• Require notice before options are exercised or shares are sold.

Employer plans often prohibit a direct transfer to a former spouse. When that happens, the employee may need to keep the award and later deliver the required money or shares.

If the award was unvested and subject to forfeiture when the divorce was filed, Indiana law generally treats it differently. It may be excluded from the property division. If it later produces income, however, that income may affect child support or another financial issue.

The same payment should not be counted once as property and again as income without careful legal analysis. The Indiana Court of Appeals has warned that stock-option proceeds cannot be treated as property in one part of a case and income in another simply because of the year involved.

What Documents Should Be Reviewed?

• Every option or RSU grant agreement;
• The employer’s equity compensation plan;
• Vesting and expiration schedules;
• Brokerage statements;
• Employment offer letters;
• Pay statements, W-2 forms, and tax returns;
• Records of options already exercised or shares already sold; and
• Company information for privately held stock.

It is also important to look for awards that may not appear on a normal pay stub.

The Bottom Line

Stock options and RSUs can be divided in an Indiana divorce, but the result depends on more than the grant date. Vesting, forfeiture, exercise rights, valuation, taxes, and the filing date may all matter.

A poorly written settlement can cause future disputes over taxes, deadlines, stock-price changes, and the timing of payments. Before agreeing to a division, both spouses should understand what exists, what is vested, what can still be lost, and what the award may be worth.

With more than 20 years of legal experience, I understand how important it is to examine both the legal and financial details. If stock options, RSUs, or other forms of deferred compensation are involved in your divorce, careful planning can help protect your rights and prevent expensive problems later.

Speak With an Indiana Divorce Attorney

If your divorce involves stock options, RSUs, bonuses, or other forms of deferred compensation, you should understand what may be included in the marital estate and how the award can be valued and divided.

The Bellinger Law Office can review the grant documents, vesting terms, financial records, tax issues, and possible methods of division.

Contact the Bellinger Law Office to schedule a consultation about property division in an Indiana divorce. You can schedule an appointment by calling us at (260) 428-2214 or by clicking on the link below.

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This article provides general information about Indiana law. It is not legal or tax advice and does not create an attorney-client relationship. Every divorce is different. Laws and court decisions may change. Speak with a qualified attorney and tax professional about your situation.