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Written by: Devin W. B.
I am currently going through a divorce. For most of our marriage my husband worked in tech and was the primary earner while I built my interior design business. Now that we are divorcing, a major contention point is his stock awards — ISOs and RSUs. It took nearly a decade for my business to start making real money, and I have zero in retirement and very little in savings. A portion of his stock awards is crucial to my next chapter. What are my rights?
— Taking Stock in Divorce
Dear Taking Stock,
You are exactly where thousands of women find themselves — on the outside of a compensation structure that was deliberately designed to be confusing. You have rights. And unless a prenuptial or postnuptial agreement says otherwise, those rights likely extend further than what your husband or his attorney has communicated.
The Law. Stock awards granted during a marriage are generally considered marital property, meaning they are subject to division in a divorce. This applies to both Restricted Stock Units (“RSUs”) that have already vested and, in many cases, unvested awards that were granted during the marriage. The fact that your name is not on the grant agreement does not mean you have no rights. It means you need someone on your team who knows how to assert those rights.
Vested vs. unvested.
- Vested RSUs and exercised options represent actual shares or cash already received during the marriage.
- Unvested awards are more complex. Courts typically use a time-based formula to determine what portion of unvested grants is marital property. For instance, if your husband received a four-year RSU grant two years into the marriage and you divorced when three years had elapsed, roughly three-quarters of that grant may be subject to division. Do not let anyone tell you that unvested awards are off the table simply because they have not vested yet.
ISOs and RSUs are not the same, and the tax consequences differ.
- RSUs are taxed as ordinary income when they vest.
- Incentive Stock Options (“ISOs”) have more favorable tax treatment but come with strict rules. First, ISOs cannot be transferred to a non-employee spouse without losing their ISO status, and if they are transferred, they convert to Non-Qualified Stock Options (“NQSOs”) and lose the tax benefit.
If your settlement involves receiving ISOs or NQSOs rather than shares or cash, ensure your attorney and financial advisor model the after-tax value of what you receive. A settlement that looks generous on paper can be significantly less valuable once the tax consequences are calculated. You want to know the net number, not the gross number.
Where you live determines the rules.
- In community property states (i.e., California, Texas, Arizona, Nevada, Washington, and a handful of others), assets acquired during the marriage are generally split 50/50.
- In equitable distribution states — the majority of the country, including Illinois, New York, and Florida — courts divide marital assets fairly but not necessarily equally, taking into account each spouse’s earning capacity, the length of the marriage, and contributions made outside of income. A decade of building your design business while supporting a household is a contribution. Make sure your attorney frames it that way.
Build the right team. Equity compensation in divorce is a specialty. Most divorce attorneys are not equipped to value stock awards correctly. You need three people working together:
- A family law attorney who has handled high-net-worth divorces involving equity compensation — not just any divorce attorney.
- A Certified Divorce Financial Analyst (CDFA) who can model the value of every grant, run the tax scenarios, and translate the equity picture into a financial settlement you can actually evaluate.
- A financial advisor who specializes in working with women in transition who can take whatever you receive in the settlement and build a plan for your next chapter from there.
You spent a decade building a design business. He spent a decade accumulating equity. Both happened inside the same marriage, which the law recognizes. Make sure your team advocates on your behalf.
THE EDGE ITEM One action item every issue.
If your spouse has equity compensation you do not fully understand, change that today. Request a copy of every grant agreement. Understand what vests when and what it is worth. Ignorance of your household’s equity picture is a financial risk regardless of your relationship status. Know what exists before you ever need to fight for it.
WHAT ARE YOU SEEING?
Have you navigated equity compensation in a divorce — as the grantee, the spouse, or the advisor? What surprised you most about how stock awards are treated in a settlement?
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