RSUs and Prenups: How To Navigate Love and Equity
Across tech and other industries, companies often supplement employees’ salaries with incentives like Restricted Stock Units (RSUs). These awards offer tremendous potential upside, but they also introduce complexities for married couples in community property states, such as California. This blog post explores how prenuptial agreements can help employees in California protect their RSUs and establish fair procedures to divide the proceeds in the event of divorce.
The Basics of RSUs and Community Property Law
RSUs are stock awards that are granted to employees when certain conditions, often tied to employment duration or performance milestones, are met.
In California, assets acquired prior to marriage are considered separate property, while assets acquired during the marriage are considered community property and are typically divided equally in the event of a divorce.
Unlike wages, which are comparatively simple to track, RSUs vest over time, which makes their characterization more nuanced. For example, if RSUs are granted before marriage, but some shares vest during marriage, which portions of the shares are separate property and which are community property?
Given the high stakes, it’s crucial for RSU recipients to understand how a divorce could impact their vested and unvested shares. Beyond the risk that hard-earned stock may later be subject to division, the cost of litigating these issues during divorce can be extremely costly, regardless of how the assets are ultimately divided.
The Role of Prenuptial Agreements
A prenuptial agreement is a legal contract that couples sign before getting married, which, among other important items, outlines how assets will be divided in the event of a divorce. For both the RSU recipient and their spouse, a well-crafted prenup can provide clarity, transparency, and protection in several ways:
Defining Separate vs. Community Property: Prenups allow couples to classify which assets will be considered separate property and which will be deemed community property. By explicitly designating RSUs (whether vested or unvested) as separate property, employees can protect their equity from being divided as community property in a divorce. Alternatively, couples can also proactively establish mechanisms to split the shares in a mutually agreeable manner.
Vesting and Valuation: In addition to addressing the treatment of RSUs that vest during the marriage, prenups can also determine how subsequent grants and yet-to-be vested shares will be treated or valued in a divorce. These agreements can be very beneficial when dealing with RSUs, whose value can fluctuate significantly based on market conditions and company performance.
Tax Implications: When RSUs vest, they are typically taxed as ordinary income, and employees might also have to pay additional taxes if they sell their shares at a later date. While a prenup cannot alter the IRS’ tax rules, it can outline responsibilities for tax liabilities related to RSUs that are divided or cashed out as part of a divorce settlement. This can include specifying who will bear the tax burden or how it will be shared.
Customizing Agreements and Reducing Conflict: Every couple's situation is unique, and prenups can be tailored to fit individual circumstances, including arrangements for RSUs earned before and during the marriage, as well as those expected to vest in the future. By addressing these complex issues before they arise, prenups can provide both parties with a clear understanding of what to expect financially in the unfortunate event of a divorce, ensuring that both parties feel their interests are protected.
For employees in California, where asset division is shaped by community property laws, prenups offer a proactive approach to protect financial interests, promote transparency, and minimize conflict. To learn more about how prenups can protect your RSU grants, please contact Shayan Family Law, APC.
