Dividing Stock Options and RSUs in Kentucky Divorce
Modern compensation packages, especially those for executives, tech workers, and corporate employees, often include stock options and restricted stock units (RSUs). As these assets often have significant current or future value, they often become a major issue in Kentucky divorces.
In this article, we will look at dividing stock options and RSUs in a Kentucky divorce – how Kentucky courts classify and divide them, and how they ensure a fair and legally compliant property settlement between the two parties.
Marital vs. Non-Marital Property in Kentucky
In Kentucky, property is divided fairly and not necessarily equally, as it is an equitable distribution state. When it comes to stock options or RSUs, the first step is determining whether they are marital property, non-marital property, or sometimes, a mix of both.
Generally, marital property is everything that was acquired from the date of the marriage to the date of separation, and this is irrespective of whose name the assets are in.
Non-marital property, however, is assets such as inheritances or gifts, anything acquired before the marriage, or anything that’s part of separate premarital agreements.
It’s important to remember that even if stock options vest after separation, the portion earned during the marriage may still be marital.
How Kentucky Courts Classify Stock Options and RSUs
The classification of stock options and RSUs is complex, as these assets often vest over time. Kentucky courts don’t just look at when the right to the stock becomes exercisable – they look at when it was earned.
To determine what percentage is marital, the courts will usually apply the “time rule” or coverture fraction. Some of the questions they examine are:
- Were the options or RSUs granted as compensation for past work?
- Are they incentives for future performance?
- Do they vest over several years?
Usually, if earned during marriage, they will be considered marital property. This is the case even if they vest after divorce. If they’re tied to post-marriage performance, that portion could be considered non-marital.
Methods for Dividing Stock Options and RSUs in Kentucky
The approaches courts use are different, depending on the type of asset and the vesting schedule:
- Deferred Division (“If and When” Method)
- When the stock vests or is exercised, the non-employee spouse will receive a percentage.
- This is often used when the asset is of a speculative or unknown value.
- Cash Buyout
- Here, the employee spouse can keep the options/RSUs, but they will pay the other spouse the value of their portion.
- This often requires a financial expert as a reliable valuation is necessary.
- Division of Shares
- Once shares vest, they could be divided directly between the spouses (depending on employer restrictions).
Any of the above methods used depend on fairness and practical feasibility.
Valuation Challenges and Employer Restrictions
It’s difficult to value stock options and RSUs for several reasons, such as:
- When then future share price is not certain.
- When vesting could depend on performance or employment.
- If certain employers restrict the transfer or assignment of shares.
Due to the above issues, courts will often rely on:
- Financial experts, e.g. forensic accountants.
- Company stock plans and vesting schedules.
- Market conditions.
When employers don’t allow direct transfer of unvested assets, deferred division is more common.
Tax Consequences
When stock options or RSUs are vested or exercised, they become subject to federal income tax. When courts determine equitable distribution, they will consider tax implications.
The spouse who receives stock could owe taxes when they exercise or sell their shares – this depends on the company plan and type of option (e.g., ISO vs. NSO).
It’s important to address tax consequences clearly in the divorce in order to avoid disputes.
Why You Need Legal Representation
Navigating stock options and RSUs in a Kentucky divorce is a challenging issue, and it can significantly impact the outcome of your case. At Hoffman Walker & Knauf, we are well versed in dealing with complex financial assets.
Contact us today for a consultation, and one of our experienced attorneys will be in touch. We will discuss your rights and options and work together in ensuring a fair division.
