What You Need to Know About Dividing RSUs in Divorce - Laurie Itkin & Scott Levin Explain

Hi everybody, this is Scott Levin, Chief Peacekeeper, family law attorney and mediator, and I'm here today with Lori Itkin. Lori, thank you so much for being here with us.

So happy to be here, Scott. Good.

Lori, can you introduce yourself for our, for our viewers real quick?

Sure. So I am a Certified Divorce Financial Analyst, also known as a And that is a professional that has received and continues to receive each year training in the financial and tax aspects of divorce. In my practice, I work mostly with mediators, either as a neutral to both parties, or occasionally I'm an advocate to one party. And I also can be helpful as a financial expert in litigated case where the attorney for one spouse needs some financial analysis and support. And beyond that, I'm also a wealth manager, a financial advisor. So sometimes if I've worked with an individual during the divorce and there's no conflict of interest, I may be asked to manage their investment assets going forward after the divorce is final. But of course, We want to make sure there's no conflict, especially if I've been as a neutral to both parties.

And before we get into our conversation today, what, what's the best— what's your website so that people can ping you and contact you that way?

Easy. I'm The Options Lady, and the website is theoptionslady.com. That's how you can reach me.

You know what's interesting? You know when someone's good when your friends Want to introduce you to somebody. So I had like 6, 7 people say, hey, do you know Lori Itkin? You have to meet Lori Itkin. You need to meet Lori Itkin. And I'm not exaggerating. Literally, I had so many people say when they find out what I do, do you know Lori? Because she's that good at what she does. So today we actually thought that we would attempt to have kind of a complicated Or not necessarily a complicated discussion, but kind of an introduction to a topic that can be fairly complex. And that's really employer-provided benefits such as restricted stock units. They're called RSUs or stock option plans. And for anyone working at, you know, Qualcomm or any of, you know, those type of companies, RSUs and stock options are a huge part of compensation. Now, in the divorce world, they add a lot of complexity. And Lori, I wrote down a series of questions. I thought that I would just run through these real quick. Because I didn't want to miss anything, kind of introducing the topic, and then I'll let you kind of fill in and we'll, we'll talk back and forth. But here are the questions, and these— and RSUs and stock options are, as a mediator, you know, it's almost in every case that I do. So it's a big, it's a big part of the practice. And Lori is someone that absolutely helps my clients and clients of mediators throughout California, really. So here's some of the questions. Is this property subject to division as an asset, or is it income that will be counted for child and/or spousal support? What portion is separate property versus community property? Taxes can make up a huge part of the RSUs. Every client that has an RSU says they're taxed in half at 50%. So when given that they're being taxed at 35% to 50% of the value, how do— how is that addressed when we're trying to separate them? How does the non-employee former spouse ensure that he or she gets his or her share Of the RSUs or stock options over the coming years when they aren't yet vested. So sometimes the RSUs will— there'll be a right to them now, but you can't— they're not yet vested so that years from now, the employee spouse will have to like notify the other person essentially. Let's see. How do you deal with the valuation when the company isn't even publicly traded? Anyway, so these are some of the questions I get, Laurie. Can you maybe jump in and give us your expertise?

Yeah, so let's set the stage, Scott. Let's say it's a couple in mediation, and let's say they want to work, continuing to work on a neutral basis with the CDFA, just like they're working with you as a neutral basis as a mediator. And as you mentioned, companies like Qualcomm in San Diego, we've got Qualcomm, VioSet, Illumina throughout California. We have Google. We have Facebook. Any high-tech company, you go in Silicon Valley, San Francisco, I mean, many people, managers, engineers, directors, you name it, much of their compensation is not just salary. It's often restricted stock units, less often stock options. So let's just talk about the basic. If you are married to somebody who gets RSUs, For restricted stock units. I assure you, they know how much they're getting. I assure you, they are checking their E-Trade or their Morgan Stanley or their Merrill Lynch, their Fidelity. They are— they know when these things are going to come. They know when they're going to vest. So they're typically provided every year. And they're really a part of your compensation. And, you know, Scott, they can make up— I mean, let's say you get $150,000 a year. You may be getting $50,000, $80,000, $100,000, $150,000 worth of these every year, so they cannot be ignored. And it's interesting, if the non-employee spouse isn't sophisticated about this, they may not even know they're there.

Yep, that happens all the time. The clients are— they, they don't even know, well, what are those? I never heard of them before. And they're like Oh, these are $75,000 worth of money.

Right. And the other confusing thing is that you might look at your tax return and you may think, wow, you know, I'm making $70,000 a year as a schoolteacher and my husband, he made— he brought $350,000 home in 2019. And the husband will say, well, wait though, my salary is only $150,000 or $200,000, you know, so So, um, the non-employee spouse gets very confused when it comes to child and spousal support because they think, well, wait, this guy's making $300,000 a year. Okay, so that's the stage. I— we— you as a mediator, me as a CDFA, we are walking into this context all the time. Wouldn't you say that's about right?

Absolutely. Yep.

Okay, so, so what do we do? So let's start tackling some of these issues. Are these things property? Are they income available for support? So let's talk a little bit about what restricted stock units are. So you may get, as part of your annual performance review, and you did a good job, you're going to get some restricted stock units. And let's— here's a typical vesting pattern. What do I mean by this is you may be awarded 100 RSUs of your company stock. And perhaps they vest 25% each year over 4 years. That's just what you— we have to look at the plan. Every company is different. So here's the confusing part. That's where I come in. Let's say the couple— let's say— we'll say the wife's the employee in this case. Let's say the wife was granted 100 RSUs on January 1st. 2019. Couple separates on December 31st, 2019. Well, these are going to vest each year over years, and some of that is community property subject to 50/50 split. But the more we go out in time, the more as those vest, they become the wife's separate property. Okay. So it's a really— it's called a time rule formula. There's case law on this. The Nelson formula is what we commonly use, sometimes But so what people need to understand is that if something has not vested yet, it cannot be sold. We cannot make money from something that is unvested. So typically what I recommend, if especially if the couple can communicate, is that as these shares vest— a year, 2 years, 3 years— the employee is required to transfer some of those shares of stock to the ex-spouse. Okay. Okay. So that's when they are property. Now here's where we get even more complicated. Those shares that are not community property divided 50/50 are now separate property of the employee. That separate property of the employee, when these Restricted stock units vest and show up on the employee's W-2, they show up on the tax return, that could be income available for the calculation of child and spousal support.

Yeah.

So yeah, there we go. We've already— we probably lost, you know, on here, right? You're probably thinking, what the heck, how do we sort this out?

Exactly. And when you're staring at me, everybody, as your mediator, You know, I, in law school, they did not teach you how to do these complex financial calculations. So, um, you, when we're faced with these, like we said, this happens all the time. What do we do? Well, we call in Lori as a CDFA certified divorce financial analyst. And she basically takes all the information. What was the value of it at the date of marriage? What was, you know, Figures out, gets all the statements, and produces a report essentially that is somehow— Lori, I don't know how you do it, but your reports are in English. Like, they make sense to even people like myself. And my clients always say that. They say, well, there's this, there's this, the math part of it, but then the summary is like, I actually understand what she's talking about.

Yeah.

You must spend a lot of time Breaking that down.

And thank you. Thank you for— I'm really glad you brought that up because I can— you'll see in my reports, I have a spreadsheet. I do the actual calculations. But what's so much more difficult and time-consuming is not the calculation. It's being able to communicate that calculation so everyone can understand. And let's think about who is everyone. It could be, and it will be, the mediator. It will be both spouses. It may be a consulting attorney that one or both spouses choose to use. It may be one or both spouses' financial advisor who they work with. So when I'm writing a memo, although it's for an intended audience, I have to be prepared that they may share this. They may share with their stepfather. I don't know. So, so typically people want to know how much is this going to cost. So I'll tell you, if Usually what I'll do is I'll have a Zoom call and I'll have the employee log into their stock account, you know, that shows the vesting schedule, shows all the plan documents. We may be on that Zoom call for an hour, hour and a half. I'm downloading— I'm asking them to download tons of stuff. It's not well organized. Let me tell you, go on to these websites. It's really a pain. You know, so we have to download all of that. And then I figure this out. And then, and then I prepare a report. And I usually say to people, a report is going to take somewhere between 3 to 6 hours of my time to do the project. I've been able— if it's very few grants, maybe I can do 2 hours, but generally the sweet spot is 3 to 6 hours.

That's a— that, I mean, that's pretty incredible because I've seen your work. And I mean, really, we wanted to kind of highlight this specific example of RSUs in the context of divorce for people because It is such a huge part of so many people's separation and split and marital settlement agreement. And it's also something that very few people really have the expertise and understanding to help calculate. So when you're in, in the mediation, in litigation, you need to have— you need to contact Lori. You need to get that report issued because both parties then will feel confident That they are dividing the actual value of these agreements. And one thing, Glory, that I understand too that you do is that you'll actually, when, when there is a vesting schedule into the future, a lot of times you will meet with, you know, the clients on an annual basis to kind of look at the RSUs, what vested that year, to make sure that the amount that was supposed to be transferred is kind of, you know, pursuant to the marital settlement agreement is in fact, you know, was correctly done.

Right. And although the employee spouse may feel threatened that I'm involved, it's actually to the employee spouse's benefit that I'm involved because we don't want to double dip. We don't want to have some of those RSUs be treated as property that will be divided and then ding that person and say, oh, these same RSUs are showing up on your W-2 and your tax return, and those are income. So it's actually counterintuitive, but it's the employee spouse's benefit to have me or CDFA do this. And of course, it's to the non-employee's benefit as well because they're going to have a translator.

Yeah, exactly. You know, it's really remarkable. So, um, I want to thank Lori. What—

your website once again is theoptionslady.com, and she is the option for CDFA work.

And, uh, now, do you work throughout the country or in California?

So, for throughout California, for CDFA, for wealth management around the country. But what I typically do is because the state laws are so unique, especially with California with our community property laws, is I do try to keep my CDFA work isolated to California, which is over 30 million people. So, I mean, if I'm going to focus on one state, hey, I got the best state. There you go. I got to get New York too, but okay.

All right. Well, thank you so much, Lori. We really appreciate you breaking this down for our listeners.

Thank you. Happy to be here.