Stock Awards: Asset or Income?

By Mary Ann Stokes

When a spouse has a compensation package that includes stock awards that vest over time, it is important to determine how the unvested portion of the awards will be treated in the divorce: As an asset or as income when they vest? Critical to the determination is whether the award was granted for work performed during the marriage. If the award was for work performed during the marriage, it is considered an asset of marriage subject to equitable distribution when it vests. The non-titled spouse is entitled to receive as equitable distribution some percentage of the after-tax value of the vested shares (in the case of RSUs) or vested options to purchase shares.

In the case of deferred compensation in the form of vested options, the titled spouse would exercise the options at the direction of the non-titled spouse, who would have to pay the exercise price and reimburse the titled spouse for the increase in taxes to the titled spouse. In the case of RSUs, the non-titled spouse would receive a percentage of the net shares received, assuming some shares were sold to pay taxes. If no shares were sold to pay taxes, the non-titled spouse would have to reimburse the titled spouse for the extra taxes the titled spouse had to pay for the non-titled spouse’s equitable share.

If, however, the awards were given not as deferred compensation already earned, but as incentive for the employee to remain with the company, then the award would not be an asset of the marriage, but would be included in the employee’s income for purposes of alimony or child support. The burden is on the titled spouse to demonstrate that the award was a long term incentive and not a form of deferred compensation. The stock plan documents are essential in understanding the intent of the award, i.e., deferred compensation for work performed (an asset) or long-term incentive (income).

If the award is distributed as an asset, it must be removed from the titled spouse’s income when calculating alimony or child support; if it is income, it is all included in the titled spouse’s income when determining alimony, child support and the ratio of the parties’ incomes. Because there may be significant consequences attendant to the determination of whether those stock awards are considered as an asset or as income, and because of the complexity of the issue, we recommend discussing this issue with an attorney.

Our family law team at Cohn Lifland has experience analyzing and discussing stock awards.