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Are unvested restricted share units (RSUs) marital property?

Restricted share units (RSUs) are a type of equity compensation similar to stock options. Both are forms of equity compensation provided to employees as a part of their overall compensation package. However, there are some key differences between the two:

Ownership: RSUs represent actual shares of the company’s stock, whereas stock options provide the right to purchase shares at a predetermined price in the future.

Granting: RSUs are typically granted outright, meaning the employee receives the shares immediately or at a future vesting date. Stock options, on the other hand, grant the employee the option to purchase shares in the future, usually at a specified exercise price.

Vesting: RSUs usually have a vesting period during which the employee must wait before they can gain full ownership of the shares. Once the vesting requirements are met, the RSUs convert into actual shares. Stock options also have a vesting period, but the employee gains the right to exercise the options (purchase the shares) after vesting.

Value: The value of RSUs is directly tied to the company’s stock price. As the stock price increases, the value of the RSUs also increases. In contrast, stock options have potential value based on the difference between the exercise price and the current market price. If the market price exceeds the exercise price, the options can be exercised for a profit.

Tax Treatment: The tax treatment of RSUs and stock options can vary. RSUs are generally taxed as ordinary income when they vest. Upon selling the shares, any gains or losses are treated as capital gains or losses. Stock options, on the other hand, may have different tax implications. The tax treatment depends on the type of options (incentive stock options or non-qualified stock options) and various factors, including the exercise price and holding period.

Risk: RSUs carry less risk for the employee since they represent actual shares with value, even if the stock price declines. Stock options, on the other hand, can become worthless if the stock price falls below the exercise price, as there would be no financial benefit in exercising the options.

Many public companies that in the past issued stock options have now moved toward restricted share units. Disney, Amazon, and Darden are some Orlando-area employers that offer restricted share units to executives and key persons.

There are no reported cases in Florida that specifically address the division of restricted share units in divorce at the time of this writing. However, restricted share units are so similar to stock options and restricted shares that there would be no reason to treat them any differently. Many Florida cases address equitable distribution of stock options and restricted shares in divorce.

In Florida, unvested stock options and restricted shares granted during marriage are not marital property if their vesting depends on post-marital job performance. This is because their value is realized through non-marital (post-divorce) labor.

Unvested stock options and restricted shares granted during marriage as deferred compensation are at least in part marital property. See Parry v. Parry, 933 So. 2d 9 (Fla. 2d DCA 2006) (“An award that is in the nature of deferred compensation and that is granted during the marriage is usually a marital asset because it is compensation for past marital labor.”). In these cases, a “coverture formula” is applied to determine the marital versus non-marital portion of the restricted share units. The marital portion is determined by a percentage equal to the marital vesting time vs total vesting time, multiplied by the value of the vested shares at post-vesting distribution.

Unlike stock options and restricted stock, the 83(b) special election is not available for restricted share units because no actual shares are delivered at the time of the grant. This can simplify some of the tax considerations involved in equitable distribution of restrictive share units in divorce. It’s important to note that specific terms and conditions governing RSU’s can vary between companies, so it’s essential to review the details of each equity compensation plan to understand the precise implications for each individual case.

Call DeVoe Law Firm at 407-284-1620 for assistance resolving equity compensation issues in divorce.

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