Managing Unvested and Restricted Stock Options in a Divorce in NJ
Unvested and Restricted Stock Options’ Value is Determined by Numerous Factors That Can Make the Asset Division a Complicated Process in NJ Divorce.
Besides working out what’s best for the children, property division can be the most challenging part of a divorce. Evaluating cash businesses, executive bonuses, and stock options are not always straightforward and may require professional help. Often, a company may offer key employees incentives to stay with the company and work hard to make the company profitable. For example, to incentivize the continued hard work of employees or augment top executives’ salaries, an employer may offer specific employees stock options or restricted stock units (RSUs). Stock options and RSUs offer employees benefits of additional income over time as the company becomes more profitable. However, regarding divorce, the RSU and unvested stock option may be difficult to divide.
Different factors will determine the value and distribution of your unvested stock options and RSUs, which requires the knowledge and forethought of an experienced lawyer who can help you prepare a plan of action if you are seeking access to, or need to protect, specific stock options in a divorce. In a high net worth divorce, a skilled divorce lawyer can also support you in advocating for a fair settlement and defending your rights and financial interests for the years to come. Call our Little Falls law office in Passaic County at (973) 233-4396 to speak with one of the skilled family and divorce lawyers at The Montanari Law Group, or feel free to use our online contact form to connect with our intake staff and schedule a free consultation.
Complications when Dividing RSUs in NJ
Vested stock options are easier to value, as they have definite purchase dates and observable values before a divorce occurs. On the other hand, RSUs may vest after a divorce; thus, a family court judge or the parties themselves must consider whether the RSU is an asset divisible at the time of divorce. Assessing marital property in a divorce requires an understanding of the law first. All assets acquired after marriage and before separation are marital assets, with some exceptions.
Stock Options as Marital Assets and How to Value Them
Stock options are more easily designated as marital assets that the parties divide when divorcing. An employer may offer select employees stock options or rights to purchase a certain amount at a specific price, typically the market price, when the employer gives the stock option to the employee. The employee must exercise the opportunity to buy the specified stock at a designated date or period. If they do not purchase when offered, the employee loses the option. They are also more straightforward to value than RSUs because of the specific purchase date and the ascertainable value when the purchase must occur.
Elements that can Impact the Stock Value
Stock options can have transferability or other restrictions that affect their value, such as when the employee may sell the stock. And some options are more accessible to arrive at a fair market value than others. For example, shares in stable, long-standing companies, may be easier to value than a start-up without a track record. However, stock values that grow steadily can result in higher tax liability. The restricted stock may have tax consequences only when restrictions end. The difference between the stock price when granted and sold is what the IRS taxes, so it matters when the employee gets the option and when they sell shares for valuation and tax purposes.
Importance of the Vesting Schedule to Determine the Stock Value
RSUs may be marital property belonging to either or both divorcing parties, but it depends on when the stock vests and not necessarily when offered. Vesting means when an employee can purchase, sell, or otherwise derive stock ownership benefits. For instance, an employer who wants to reward a valuable employee with additional income may offer RSUs that vest in five years to motivate the employee to stick around until the stocks vest and can be sold or kept in the employee’s portfolio.
The value and tax consequences for selling RSUs are far less certain before vesting. Thus, an RSU offered to an employee in 2019 may not vest until 2023. When the RSU vests, it becomes taxable income. If the employee’s stock portfolio significantly increases after vesting and their income increases after a stock sale, they are liable to pay higher taxes. Conversely, when a newer, less well-known company offers RSUs that vest a year or two in the future, the company may decline or go out of business in that time, resulting in no additional income to an employee and no taxes. Each party’s tax liability is relevant to an equitable division of the marital assets and debts.
Uncertainty of the Future When Valuing Restricted Stock Units
Valuing RSUs is difficult because of the future and conditional value of the asset. Some bets are more calculable than others, such as big-name companies. What the future holds, however, is always uncertain. World events, politics, and many other variables affect goods, services, company values, and, thus, stock values. And yet, all assets must have assigned values to divide them equitably in a New Jersey divorce. The law requires an equitable division. It does not mandate that the parties split everything down the middle to accomplish that goal.
Creative Ways to Solve the Non-transferable Component of RSUs
RSUs are typically not transferable. Some stock options may likewise have transfer restrictions. Both belong to the employee as compensation or incentives for their outstanding efforts and value to the company. As such, a court may not assign them equally to each party to a divorce. To make the division fair, the one who does not get the RSUs or stock options must receive something else of equal value. But there are creative solutions, such as awarding one party more of the remaining marital property to offset the value of the RSUs or unvested stock options granted to the other. And if there are no other assets, a judge may assign one party’s debts to the other in an amount equal to one-half of the estimated value of the stocks. The parties can also hold the RSUs in trust until they vest and then divide them, along with their tax liability.
Contact The Montanari Law Group to Protect Your Interests in the Unvested and Restricted Stock Division Process in New Jersey
It is extremely important to hire a divorce attorney with advanced knowledge in the complex valuing and dividing executive compensation and incentive if your divorce includes employee stock assets. While an experienced divorce and family lawyer at The Montanari Law Group can help you come up with solutions to how best to get a net value and divide RSUs and stock options in the present or future, we can also provide an equally valuable service. Since RSUs do not show up on tax returns until vesting, when they have verifiable value (the then-current market value), the non-employee spouse may not know about them. For this reason, an attorney on your side is invaluable.
With in-depth knowledge and experience handling high asset divorce cases involving complex financial issues, our lawyers can conduct thorough discovery and connect you with a knowledgeable forensic accountant to find unknown assets like RSUs, cash payments, offshore accounts, and the like. Our skilled divorce attorneys know how to consider and work with experts to uncover and prove the existence of hidden assets when one party does not voluntarily reveal all of their present and future property. Our team will take the time to analyze all possible options to protect your financial stability in Wayne, Clifton, Caldwell, West Milford, Montvale, Wyckoff, Woodland Park, Kearny, and towns in Passaic County and Northern New Jersey.
Avoid costly mistakes. Contact us today at (973) 233-4396 to speak with a lawyer about unvested and restricted stock options in your divorce free of charge today.