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Divorce is stressful and emotional for many reasons. Couples are forced to divide everything, from real estate to debt, in a way that is fair for both individuals. Stock options and stock units are among the assets that may require distribution, depending on when they were acquired.
Dividing stock options and restricted stock units fairly requires a firm understanding of how these types of assets are granted by an employer and why, but a qualified New York divorce lawyer at Aiello & DiFalco LLP can provide valuable legal guidance.
Stock Options and Stock Units Explained
There are some differences in stock options and stock units that might impact how they are distributed in a divorce.
A stock option gives an investor the right, but not the obligation, to buy stocks of a company at a pre-set price within a specific timeframe. Employers commonly use stock options to attract new employees or maintain their current employees.
The appeal of stock options is the choice to own stocks of a company at a discounted price instead of buying through the open market. Because an employee takes actual ownership of stocks over a certain period, called the “vesting period,” this helps employers retain their employees for a set time in order for them to get their stocks.
As the name implies, stock options give investors the “option” to buy stocks. They do not own the stocks unless they purchase them.
In a divorce, this may mean that there are stock options that have not been “exercised”, meaning the employee has not purchased any shares. It may also mean that the stocks are “under water” such that it does not make financial sense to purchase stock that has dropped in price below the exercise price.
Restricted stock units (RSUs) are one type of restricted stock which are often awarded to employees of tech companies and other startups. Restricted stocks are stocks that cannot be fully transferred without first meeting certain restrictions. Restricted stock units can be awarded once an employee reaches certain benchmarks or on a regular vesting schedule.
RSUs are not stocks, just units. The units an employee gets correspond in number and value to a specific number of employee stock shares. As the employee continues working for the company, more stock units “vest” and become available as an asset to that employee.
Often, there are restrictions on whether these RSUs can be transferred or sold to third parties, which might make distribution of these assets tricky. The speculative value of private startup companies may also make these assets attractive, but risky.
Many confuse stock options and stock units, and while the two share some similarities, they are different. The two are used by companies to attract and keep employees, but what employees actually get are two different things. Also, stock options require purchasing, while stock units do not. Both typically have vesting and other issues that might make distribution of these assets more complicated than regular shares of blue chip stock held in a brokerage account.
How does New York handle property distribution in a divorce?
It is important to understand how New York handles property division in a divorce. States operate under legal theories of equitable distribution or community property. New York is an equitable distribution state.
Equitable distribution means judges divide property in a way that is equitable, or fair, to both spouses. The exact manner in which property is distributed depends on the couple, their circumstances, and other factors.
Marital property is the only type of property up for distribution in a New York divorce. This property encompasses the property and assets spouses acquire during the marriage. Any property that belonged to either spouse before they entered the marriage is separate and, therefore, is not subject to distribution.
How are stock options and stock units divided in a New York divorce?
First and foremost, it’s necessary to determine whether the options or units are marital or separate property. Stock options and stock units acquired during a marriage are considered marital property and, therefore, subject to distribution.
Determining whether stock options or stock units are marital may depend on the vesting schedule. Unvested shares as of the date of the divorce which require a spouse to continue working at the company or which are based on hitting certain milestones may be partially or entirely separate. Unexercised stock options may not be marital, or may be worth exercising and dividing using other marital property during the divorce process.
To proceed with distribution, you’ll need to assign a value to the options and units. There are several ways to determine the value of stocks, depending on whether they are for publicly traded or private companies. Sometimes, accountants are brought in to calculate the marital versus separate components of a stock plan based on the percentage of the shares which have vested or which remain unvested.
Dividing the stock options and units can be challenging, based on the circumstances. However, in some cases, instead of dividing the stocks themselves, which could trigger adverse tax consequences, the non-employee spouse may agree to some other asset of the same value. There could be capital gains taxes which have to be considered.
Dividing stock options or stock units can be tricky, but a skilled divorce lawyer knows how to handle this critical part of a divorce to reach the fairest resolution.
Allow a New York Divorce Attorney to Help You with Your Divorce
The divorce attorneys at Aiello & DiFalco are knowledgeable and experienced in family law. We’re dedicated to guiding clients through the challenges of divorce, working diligently to represent their best interests.
We encourage our Garden City, NY, clients to contact us and schedule a consultation with one of our divorce lawyers.