Arizona is a community property state, which means marital assets must be divided as close to 50/50 as possible in a divorce. Because equity compensation can be complex, many spouses work with a Chandler divorce lawyer or Chandler family law attorney to understand how stock options and Restricted Stock Units (RSUs) are treated under Arizona law.
Under A.R.S. § 25-211, community property includes:
“All property acquired by either spouse during the marriage.”
Dividing traditional assets like bank accounts can be straightforward. Dividing stock options and RSUs, however, often requires legal analysis, valuation experts, and a clear understanding of vesting schedules and employer intent.
Asset division is simple for couples with minimal property, but becomes significantly more complicated when spouses hold investment assets and equity compensation.
A Chandler divorce lawyer can help determine which portion of an equity award is subject to division.
Employees in Arizona and elsewhere are often entitled to benefits, such as employee stock options (ESOs). A stock option permits an employee to purchase a set number of stock shares at a specified time and typically at a price below market value (the strike price).
In other cases, the employee benefit is an RSU rather than an ESO. An RSU is stock granted or awarded to an employee under a vesting plan with a predetermined vesting schedule, such as after an employee has worked for the company for a specified number of years or has achieved an employment milestone. In other words, the stock is promised to the employee upon hire, but the employee does not own the stock until their employment satisfies the employer’s vesting requirements.
Unlike a typical stock option, employees do not have to pay for an RSU. They may sell or retain the RSU only after it’s vested, at which time it is valued at its full market value. In certain employee RSU benefits, the employee only receives the difference in cash value between the strike price and the current market value at the time that it vests. The employee must cash it in at that time; otherwise, it will be void after the vesting date passes.
Both ESOs and RSUs are taxable income.
All community property in an Arizona divorce must be divided fairly, including stock options. However, an RSU presents unique challenges in determining whether it constitutes community property when not yet vested at the time of divorce. Generally:
However, Arizona courts follow the precedent set in Brebaugh v. Deane, which focuses on the employer’s intent:
Because many RSUs reward continued employment, the classification often depends on employment agreements and plan documentation. Courts may divide only the community portion based on time worked during the marriage.
Stock values fluctuate based on various factors, including the economy and the company’s performance. RSUs have no value until the employee cashes them out at the current market value. For these reasons, divorcing spouses in Arizona must have a valuation performed for employee stock options and RSUs to determine their current value as of the date of separation.
Often, this becomes complex due to vesting schedules and tax considerations. When one spouse is granted a share of a stock option, a constructive trust may be required to ensure that the non-employee spouse receives their fair share once the stock vests.
When divorcing spouses can communicate and compromise effectively during the divorce process, they may be able to save time, legal fees, and contention by crafting a settlement agreement that meets the court’s requirement for the fair and equitable division of their marital assets, including stock options and RSUs when they are considered community property.
The options for division include the following:
An uncontested divorce often requires a professional mediator who suggests creative solutions for dividing marital assets. Agreeing on divorce terms and signing a settlement agreement enables divorcing spouses to avoid costly and contentious disputes that require presenting their arguments before a judge.
When spouses cannot arrive at mutual agreements on key aspects of their divorce, such as disagreeing on the valuation of stock options and RSUs, disputing whether or not these assets are individual or marital property, or disagreeing on how to divide them fairly, a judge will consider evidence and testimony from both sides before making a ruling and issuing binding divorce orders.
Working with an experienced Chandler divorce attorney from Wilson-Goodman Law Group, PLLC is critical when equity compensation is disputed, as mistakes can lead to significant long-term financial consequences.
