Dividing RSUs in Divorce

How RSUs Work

A restricted stock unit is a promise by an employer to deliver shares of company stock upon satisfaction of certain conditions, typically continued employment over a defined vesting period. Unlike stock options, RSUs carry value as long as the underlying stock does; there is no exercise price to consider.

Most Bay Area tech employers use time-based vesting schedules, commonly structured as a four-year vest with a one-year cliff:

• No shares are delivered until the employee has completed one year of service
• At the one-year mark, 25% of the grant vests
• The remainder vests in monthly or quarterly increments over the following three years
• Some employers layer in performance-based conditions tied to company or individual milestones

The practical effect is that RSU grants routinely span both the marriage and the period after separation, which is precisely what makes them complex to divide.

Community Property, Separate Property, and the Time Rule

California's community property framework requires that assets acquired during the marriage be divided equally upon divorce. A single RSU grant can have both community and separate property components depending on when it was made and when it vests.

California courts generally apply the time rule to apportion RSU grants. Under this formula:

• The community property portion is determined by the ratio of time the employee worked during the marriage relative to the total vesting period
• The separate property portion corresponds to time worked outside the marriage — either before or after the date of separation

As a simplified example: if a grant has a four-year vesting period and the marriage covered two of those years, roughly half of the grant's value may be treated as community property. The actual calculation depends on the specific grant terms, the date of marriage, the date of separation, and how California defines the relevant time periods.

It is also worth noting that the time rule is not the only approach California courts have accepted. In some circumstances, courts have applied alternative methodologies depending on whether a grant was intended to compensate for past services, future services, or both. The characterization of the grant itself can affect how it is apportioned and is frequently disputed.

Unvested RSUs at the Time of Divorce

Among the most frequently disputed issues in tech divorce cases is how to handle RSUs that have not yet vested at the time of separation or at the time the divorce is finalized. These grants have real value but no current liquidity — the shares cannot be sold, and their future worth depends on continued employment and stock price.

Several approaches exist for addressing unvested RSUs:

• Deferred division. The parties agree to divide unvested RSUs as they vest over time, with the non-employee spouse receiving their community property share of each tranche when it is delivered. This preserves accuracy but requires ongoing contact between former spouses and a mechanism for enforcing the arrangement.
• Present value offset. The parties agree on a present value for the unvested RSUs and the non-employee spouse receives an equivalent share of other community assets, such as cash, real estate equity, or retirement accounts, at the time of settlement. This provides a clean break but requires agreement on a present value figure, which introduces its own complexity given stock price uncertainty.
• Retained interest with adjustment. In some cases, the parties agree that the employee spouse will retain all unvested RSUs subject to a future accounting or adjustment, with a true-up mechanism built into the settlement agreement. These arrangements require careful drafting.

Each approach has tradeoffs. The right choice depends on the overall composition of the marital estate, the size of the unvested grants, the employer's stock price trajectory, and the preferences of both parties.

Tax Considerations

RSU taxation introduces another layer of complexity. When RSUs vest, the value of the delivered shares is treated as ordinary income to the employee and is subject to federal and state income tax, including California's top marginal rate, which applies to many Bay Area tech professionals. The employer typically withholds shares to cover the tax obligation at vesting.

When a non-employee spouse receives a share of RSUs through divorce, the tax treatment depends on how the transfer is structured. Transfers incident to divorce under Internal Revenue Code § 1041 are generally not taxable events at the time of transfer, but the recipient spouse will face tax consequences when the shares are eventually sold. Capital gains treatment at that point depends on the holding period and the cost basis established at vesting.

These implications need to be factored into the division analysis. A settlement that appears equal on paper may not be equal after taxes. We work with clients and their financial advisors to ensure that tax consequences are accounted for in the overall property division.

Reaching a Resolution

RSU division cases resolve in one of two ways: negotiated settlement or litigation. Most cases, including those involving substantial and complex equity positions, settle — provided both parties have reliable information and competent representation.

Effective negotiation requires a clear picture of all outstanding grants, their vesting schedules, their current value, and their tax profiles. It also requires an understanding of the employer's plan documents, which may restrict certain transfers or impose conditions on how shares can be handled in a divorce. We gather and analyze this information early in the process so that our clients negotiate from a position of knowledge.

When settlement is not possible, we are prepared to litigate. California courts have well-developed case law on RSU division, and an attorney who understands both the financial mechanics and the applicable legal standards is essential when these issues go to a judge.

Frequently Asked Questions

Are RSUs Granted Before Marriage Subject to Division?

RSUs granted entirely before the marriage and vesting entirely before the marriage are generally separate property. However, if a pre-marital grant vests during the marriage, the vested shares may have a community property component under the time rule. The specific facts, including grant date, vesting schedule, and marriage date, determine the outcome.

What Happens to RSUs Granted After the Date of Separation?

RSUs granted after the date of legal separation are generally the separate property of the employee spouse and are not subject to division. However, grants made after separation that were awarded in part for services performed during the marriage may have a community property component. This issue arises most often when an employer makes a retention grant or a performance grant that straddles the separation date.

Does My Employer's Plan Document Affect How RSUs Are Divided?

Yes. Many equity compensation plans restrict the transfer of unvested awards to a spouse in connection with a divorce. In these situations, the non-employee spouse may not be able to receive the RSUs directly and will instead need to receive an equivalent value through other assets or a cash settlement. We review plan documents as part of our case preparation to identify any restrictions that affect the available resolution options.

How Is the Value of Unvested RSUs Determined for Settlement Purposes?

There is no single accepted method. Some parties use current fair market value, discounted to reflect the risk that the employee will leave before vesting. Others use a risk-adjusted present value based on expected vesting probability. The right approach depends on the circumstances, including how stable the employment situation is and how volatile the underlying stock has been.

Do RSUs Affect Spousal Support Calculations?

Potentially. When RSUs vest and are delivered as income, they may be considered in a spousal support calculation. The treatment depends on whether the RSU income is recurring or episodic, and how the court characterizes the compensation relative to the employee spouse's base salary. This is an area where the advice of experienced counsel is particularly important.

Your Equity Has Real Value. Make Sure It's Protected.

For many Bay Area tech professionals RSUs represent years of earned value tied to work performed during the marriage. Whether you are the employee spouse looking to understand what you may owe or the non-employee spouse trying to protect your fair share, getting the analysis right from the beginning matters.

Call (415) 805-9069 or reach us online to schedule your complementary case evaluation. We serve clients throughout San Francisco and the Bay Area.