How Illinois Courts Divide Stock Options, RSUs, and Deferred Compensation in Divorce
Under the equitable distribution system Illinois uses, the courts allocate marital property in a way they believe is fair. The division is not necessarily equal, and courts weigh variables such as the length of the marriage, each spouse’s contributions, income, and future earning capacity.
For stock options and RSUs in an Illinois divorce, courts focus on the award’s timing and reason for the award. A few principles about these types of compensation are important to understand.
- Stock options let an employee buy company stock at a set price after the options vest.
- Restricted stock units (RSUs) are promises to deliver stock once an employee meets vesting conditions, often time-based.
- Deferred compensation includes bonuses or earnings that a person earns now but gets paid for later, sometimes years after the divorce.
The Timing of Accrual Matters
Often, courts use a time-based or “coverture” formula for the division of stock options and RSUs. Simply put, the court calculates what portion of the award the spouse earned during the marriage and treats only that portion as marital property.
Courts may opt to divide options or RSUs that vest even after the divorce if the spouse earned them, at least in part, during the marriage. Deferred compensation plans get similar treatment. If the compensation reflects work a spouse performed while married, it is typically marital, even if payment occurs years later. The same goes for how courts handle dividing retirement accounts and pensions, where the timing of accrual matters more than the payout date.
Marital vs. Non-Marital Treatment of Executive Compensation in Illinois
Executive compensation in high-asset divorce often blurs the line between marital and nonmarital property. This is because compensation agreements frequently mix past performance, future incentives, and retention goals.
Marital Treatment
Stock options, RSUs, or bonuses are usually marital if a spouse got them for past performance that occurred during the marriage, earned them as part of regular compensation while married, or if the employer intended them as a reward for work already performed during the marriage.
Nonmarital Treatment
Compensation may be nonmarital and not get divided in Illinois divorces if the employer granted it before the marriage or if the compensation agreement makes clear that it rewards work that takes place post-divorce. A similar principle applies if the employee earns the compensation after separation for future performance.
The Risk of Hidden or Undervalued Assets
It can be tricky to tell if your spouse is hiding assets. However, executive compensation is an area where a spouse may try to minimize what to divide.
Complex vesting schedules, offshore accounts, and deferred payment structures can make it easier for a spouse who hides assets to say that compensation is not guaranteed or not yet earned. In asset concealment situations, forensic accountants and detailed discovery may be necessary to trace ownership, figure out if the compensation relates to marital efforts, and establish a good basis for valuation and division.
The Perils of Social Media
Social media can impact high asset divorce cases as well. Posts about bonuses, promotions, or equity awards can directly contradict claims and make a difference in decisions about whether something is marital or nonmarital. Posts such as “Big vest today,” “Equity finally hit,” or “RSUs coming through this quarter” can contradict claims that compensation is speculative or not yet earned.
Negotiated Agreements
When spouses negotiate a settlement between themselves, they have more flexibility with complex compensation than they would in a court-imposed ruling. Legal frameworks and formulas can bind judges and limit their creativity, especially with sophisticated compensation types.
By contrast, negotiated agreements allow spouses to tailor outcomes to their financial realities and long-term goals. For example, one spouse may agree to waive an interest in unvested stock options in exchange for a larger share of liquid assets, retirement accounts, or real property.
Other agreements may structure buyouts, offset future payouts, or account for tax consequences in ways a court may not be able to implement as precisely. Negotiation also allows the spouses to get customized with timing issues, such as vesting schedules or performance-based bonuses.
Valuation and Timing Issues for Executive Bonuses and Equity Awards in Illinois Divorces
Valuation can be the trickiest part of dividing executive compensation. While a bank account may have a clear value at the time of divorce, stock options, RSUs, and bonuses may not.
Executive Bonuses
Executive bonuses may be guaranteed, performance-based, or discretionary. Sometimes, a spouse earns a bonus during the marriage but gets paid for it later. With an annual bonus paid in February for work done the prior year, the court would probably consider it marital if the spouse was married and not yet separated during that performance period.
Courts may divide bonuses by awarding a percentage when the employer pays them, estimating value and offsetting with other assets, or deciding to divide later when they know the amount. Offsetting means the court assigns the bonus to one spouse and compensates the other spouse with marital assets of comparable value, such as cash, investment accounts, or additional equity in other property. For example, the median value of a home in Glencoe is $1,432,500. That money could offset executive compensation, if needed.
Stock Options and RSUs
For stock options and RSUs in Illinois divorce, valuation depends on vesting schedules, strike price (for options), market volatility, and restrictions on sale. Some courts prefer a “deferred distribution” approach. The non-employee spouse receives a share if and when the award vests. Others assign a present value, which can be risky if the stock price fluctuates quite a bit. An attorney with experience in executive compensation division in Illinois divorce can work with valuation experts to present an approach the court should approve.
Tax Considerations
Stock options and deferred compensation may lead to tax consequences when they are paid or exercised. When courts divide these assets, they also consider who bears the tax burden.
If you have questions in the Glencoe area about stock options, RSUs, or other executive compensation in your divorce, contact us today at Silberman Law Group.
FAQs About How Stock Options and RSUs Are Divided in Illinois Divorces
Are stock options and RSUs considered marital property in an Illinois divorce?
They can be, to the extent a spouse earned them during the marriage, even if they vest or are paid after the divorce.
How are deferred compensation and executive bonuses valued and divided in Illinois?
Courts look at when the spouse earned the compensation. Courts may divide it when paid, assign a present value, or reserve valuation decisions for later, depending on the circumstances.
What happens if stock options or RSUs vest after the divorce is finalized?
If the employee spouse earned them during the marriage, Illinois courts may still award the non-employee spouse a share under a deferred distribution approach.
