Professional Compensation & Divorce
If you are a business professional considering, or going through, divorce or married to one, there tends to be an additional layer of complexity to your finances. That being said, it is crucial to handle your restricted stock units (RSUs), performance stock units (PSUs), stock options and/or warrants from an employer correctly or it could possibly cost you BIG money! Even if divorce is not eminent in your relationship, having the right mindset about these when you’re married can be helpful, as in most situations at least part of these are a marital asset.
So what are RSUs, PSUs, Warrants, and stock options?
Essentially, these are instruments that give employees the right to buy a company stock at a specific price for a defined period. Usually these are spelled out in HR documents provided by the company or employee contracts at hire. Typically, I see these tied to performance-based compensation. RSUs are simply units that are tied to a stock. When RSUs vest, the employee receives the real shares of stock in an account. Warrants are similar but are not immediate ownership in a stock and more long-term in nature. Stock options are becoming less common and function like RSUs. PSUs work similarly but are also tied to the employee’s performance.
In divorce, what makes this marital property?
If these are awarded and vested during the marriage, they are 100% marital property and subject to being split with your spouse in divorce. If they are NOT vested, it gets a bit more complicated. First, we must determine if they were given for past performance or future performance metrics. Then, we apply a proprietary method to determine what portion is marital and non-marital. We also need to determine the value of these at the date of filing for the divorce. We can use these to help you gain an understanding of how these will function for you in the future based on the agreement with your spouse.
In summary, we come up with the amount of units/options that is marital and then value them to determine the marital property value which is available for equitable distribution.
If these are somehow going to be split with a spouse in divorce, shouldn’t business professionals also think about tax implications?
RSUs are taxed as ordinary income when they vest and capital gains when the stock is sold. Options are similar. Typically, when the option is exercised, ordinary income tax will be due. When these are sold, it will be taxed as capital gain. It is a bit more complex than this, but this will give you a general idea. PSUs and Warrants are similar and require your tax professional to understand the nature of the compensation. We coordinate this process for our clients post-divorce so nothing is missed.
What are some other important considerations?
We must deal with the fact that if the employee is going to continue to get these stock awards as regular compensation moving forward, they more than likely are considered income for child support and possibly alimony. Sometimes people feel like these are being valued twice: 1) as a marital asset and 2) as income, but these are actually different, with part being a marital asset and part income.
Understanding the tax implications on your future cash flow is key to success. We find this is often ignored in marital settlement agreements and you could pay the price later!
RSUs, PSUs, Warrants and stock options are complex to understand, but it is important to know how these will have an impact on your financial future post-divorce. By collaborating with us as a CERTIFIED FINANCIAL PLANNER™ and Certified Divorce Financial Analyst®, you can set yourself up for financial success. Contact The Financial Knot® today and learn how we can help!
The Financial Knot® is another business name for Independent Advisor Alliance, LLC. All financial planning advice is offered through Independent Advisor Alliance, LLC, a registered investment advisor.
