When your divorce involves stock options, restricted stock units (RSUs), or other forms of executive compensation, the stakes become significantly higher. These assets add layers of complexity to an already challenging process, often involving vesting schedules, valuation disputes, and tax consequences that can dramatically affect your financial future.
This article will examine how Maryland courts handle these complex assets and why specialized legal guidance is essential for securing a fair outcome.
Examining Executive Compensation in Divorce
Stock options give employees the right to purchase company shares at a predetermined price. At the same time, RSUs represent a company’s promise to deliver shares once certain conditions are met. These compensation forms are often subject to vesting schedules that span years, creating questions about whether unvested options or RSUs should be considered marital property and how to value them fairly.
How Maryland Courts Classify These Assets
Maryland follows the equitable distribution principle, meaning courts divide marital property fairly, not necessarily equally. Under Maryland Family Law Code Section 8-205, courts consider numerous factors when determining how to distribute assets, including how and when property was acquired and the contributions each party made to the marriage.
For stock options and RSUs, classification depends heavily on timing. Typically, income acquired during the marriage is regarded as marital property. However, when options vest over time, courts must determine which portion relates to past service during the marriage and which to future service after separation.
If stock options are granted prior to marriage but become vested during the marriage, only a part of them may be considered marital property. Conversely, options granted during marriage but vesting after divorce might still be partially marital if they compensate for work performed during the marriage.
Valuation Challenges
Determining the value of unvested stock options presents several difficulties. Unlike liquid assets, these equity instruments have uncertain future worth. Financial professionals use valuation methods that account for the current stock price versus the option exercise price, the time remaining until vesting, historical stock volatility, market conditions, company performance, and the risk that options may never vest.
For privately held companies, valuation becomes even more complex, requiring detailed financial analysis and professional business valuation services.
Tax Implications That Affect Settlement
The tax treatment of stock options and RSUs can significantly impact what each spouse ultimately receives. When non-qualified stock options are exercised, the difference between the exercise price and the current market value is taxable as ordinary income.
RSUs are treated as ordinary income for tax purposes upon vesting, and federal tax rates can reach up to 37%. These tax consequences mean sophisticated financial analysis should account for federal and state income taxes, capital gains taxes on subsequent stock sales, and the timing of tax events relative to the divorce.
Vesting Schedules and What Maryland Courts Consider
Vesting schedules complicate property division because they extend beyond the divorce date. When a divorce occurs during the vesting period, courts must decide how to handle unvested portions. Some couples negotiate buyout arrangements via a divorce attorney in Howard County, MD, in which one spouse pays the other for their share of unvested options at an agreed-upon present value. In contrast, others agree to divide the proceeds when options eventually vest and are exercised.
Maryland Family Law Code Section 8-205 requires courts to evaluate multiple factors when dividing marital property, including the contributions each party made to the family’s well-being, both monetary and non-monetary. This means courts recognize that one spouse’s career success may have been made possible by the other spouse’s childcare or household management. Courts also consider the financial status of both partners and the duration of the marriage.
The Discovery Process and Working With Professionals
Obtaining complete information about executive compensation requires thorough discovery via a Howard County, MD divorce attorney. Expect to collect grant agreements and award letters, company stock option plans, vesting schedules, historical stock price information, tax returns showing past exercises, and brokerage account statements.
Cases involving significant stock options often require teamwork between legal and financial professionals. Certified financial planners, forensic accountants, and business valuation professionals help by performing accurate valuations, analyzing tax consequences of different settlement scenarios, and providing testimony when necessary.
Safeguarding Your Financial Interests
Keep thorough documentation of all equity grants, exercises, and sales. Document your contributions to your spouse’s career advancement, including relocations for job opportunities or sacrifices you made for the family. Knowing the company’s policies on divorce is essential, as some plans have specific provisions that affect how options can be divided.
Think about the long-term effects of various settlement arrangements. Immediate cash settlements provide certainty but may undervalue assets with growth potential. Deferred division arrangements maintain upside potential but require ongoing financial ties to your former spouse. Working with a Howard County, MD divorce attorney who handles high-asset divorces involving stock options helps you receive guidance personalized to these particular challenges.
Speak with a Proven Divorce Attorney in Howard County, MD
At Milstein Siegel, we understand that divorce involving stock options and executive compensation requires both legal knowledge and financial sophistication. Our Howard County, MD, divorce attorneys collaborate closely with financial professionals to provide precise valuation and equitable distribution of these intricate assets. Our team has guided numerous clients through high-asset divorces in Maryland, protecting their economic interests during settlement negotiations and in court when necessary.
If you’re experiencing divorce proceedings involving stock options, RSUs, or other executive compensation, contact us online or call (443) 230-4674 to schedule a consultation.