Navigating Financial Assets in Divorce

• Understand everything!

• Get help if needed!

Divorce is messy, and when you’re untangling complex financial assets like brokerage accounts, RSUs, stock options and retirement plans it is imperative you have a comprehensive understanding of all details. A strong attorney and financial advisor can help tremendously. If you’re not 100% clear on the what and why of the financial divide, you might be getting railroaded. 

This post is in no way financial or legal advice, but simply aims to highlight complexities and nuances that can sway the balance of assets divided.

1 - Taxable Brokerage Accounts: Watch the Cost Basis

Dividing stocks in a taxable brokerage account seems straightforward: split the shares and move on. Under IRC 1041 transferring brokerage assets to a spouse and in divorce is tax free, but the nuance is understanding the “Cost Basis” of the shares being transferred. 

Why? Because, when you eventually sell that stock someday you’re going to pay tax on the gain, measured as the difference between the sale price and the cost basis. 

Imagine your husband has 1000 shares of Company DIV in his brokerage account currently trading at $200 (total value of $200,000). He gives you 500 shares as agreed in the divorce settlement with a fair value of $100,000. All good, right? 

What if those shares were acquired at different points in time? Maybe some were acquired for $50 and others for $150. What if he gave you the shares acquired for $50? When you sell those shares, you’ll owe tax on the sale price of $200 less the cost basis of $50, or $150/share. So your taxable gain is $150 * 500 shares = $75,000. You owe taxes on a gain of $75,000. 

On the other hand, he sells his 500 shares later for $200, but his cost basis is $150. So he’s only paying tax on a gain of $50/share. His taxable income is 500 shares * $50, or $25,000. 

In this case a higher tax liability was shifted to the wife!

Key Takeaway: You need to understand the Cost/Tax basis of financial assets. 

2 - Restricted Stock Units (RSUs)

RSUs—company stock granted as compensation—are common in tech and executive pay but tricky in divorce due to vesting schedules and tax rules.

Quick primer: Generally an employee is granted RSU’s annually as part of compensation and they vest over a period of time; for example 4 years. One could be granted 100 RSU’s of Company DIV on Jan 1, 2024 that vest 25% annually. So 25 RSU’s vest or become available every year for 4 years.

Understanding Vesting and Service Periods

The tricky part of splitting RSU’s in a divorce is determining how many RSU’s are/were Community Property (CP) prior to Date of Separation (DoS). 

For example, if DoS is Dec 31, 2024, prior to any RSU’s vesting, are any RSU’s included in CP? 

The short answer is likely “YES” as the husband was earning those options during the marriage. A vest period is also commonly referred to as a “service period”. So he was earning those RSU’s while he was serving in employment during the marriage. The wife here would/should argue that 364/365 of those RSU’s are CP.

This can get very complicated and confusing. What if all the options “cliff” vest after 4 years of service. What if they vest in non-conforming numbers: like 10% after 1 year, 20% two years, 30% three years and 40% at year 4?   

Key takeaway: the wife is generally entitled to some portion of RSU’s if they were granted prior to DoS! 

Cash vs. RSUs

Most company stock plans do not permit the transfer of “unvested” RSU’s. Therefore, you might carefully think thru, whether your settlement requires:

1. The transfer of shares after they vest, or
2. Negotiate a cash settlement now for those unvested shares. There are assumptions that go into this analysis that can materially affect the calculation; including Stock Price and Tax rates.

3 - Stock Options

Stock options give the employee the right to buy Company DIVR stock at a predetermined price; referred to as the exercise or strike price. The exercise price is the value of the underlying stock of Company DIVR on the grant date; so the options only have value if Company DIVR goes up in price. Stock options can be comple

x to understand, but here are a few key takeaways: 

1. If the options are vested, you likely should negotiate taking ½. Many company stock plans will allow a change in ownership of non-qualified stock options.j

Why take the options and not cash? Again, very complex to explain, but a powerful aspect of “options” is inherent leverage. Long story short: If you think the stock will go up over time, you’re likely better off holding the options, than asking for cash. 

1. Similar to RSU’s if there are unvested stock options on the table you should negotiate a cash payout or variable compensation arrangement when those options vest. 

If the husband works for a non-public company he could be receiving ISO stock options, which makes the analysis even more complex. 

Key Takeaway: Options can be very complex and very valuable; it is imperative that you understand the holdings and al

l the terms and make sure you’re getting your fair share.

4 - Spousal Support and Capturing Variable Income

Spousal support or “alimony” is often a component if divorce settlement. The wife and husband may ultimately agree to a fixed dollar amount to be paid to the wife for a set number of years. In our example here, the husband works in tech and it's likely that RSU’s are a large % of his compensation (it's not uncommon to be between 30% - 50%).

It is imperative that you consider the future value of RSU’s in spousal support. It seems obvious but sometimes the attorneys only look at fixed pay and a bonus assumption. But you need to look at future RSU’s as they can be extremely valuable.  

Key takeaway: If negotiating spousal support based on current or future earnings you MUST understand how RSU’s fit in the picture.  

5. Retirement Accounts

Retirement accounts may include past and current 401(k) plans, IRA’s and Roth IRAs. These accounts are very common and fairly straight-forward, so there isn’t as much complexity. The obvious is ensuring you have a comprehensive understanding of all the accounts in existence and ensuring paper-work (QDRO’s for example) is filed accurately and timely.

How might someone casually hide or not disclose? 

• Simply not disclose the accounts. 
• Liquidate old 401(k) to cash – paying the tax and penalty – just to eliminate their existence. 
• Roll some balance of known IRA’s into newly created accounts at a different brokerage; and of course not disclose. 

Key takeaway: Understand the full universe of accounts and review transaction history! 

6. Other Financial Assets

Don’t overlook:

• Employee Stock Purchase Plans (ESPPs): Discounted stock buys are divisible but need tracing around DoS.

• Crypto Accounts: Volatile, with basis issues like stocks; hidden wallets are common.

• Margin Loans: Debt against brokerages reduces divisible value—check statements.

• Deferred Compensation: Unvested plans need expert valuation.

• Pensions: Less common now but valuable; require QDROs and actuarial analysis.

• Life Insurance and annuities: Very complex and lot’s of potential value. 

Key Takeaway: Understand EVERYTHING!

Final Takeaway

Divorce demands vigilance with financial assets. Tax basis, vesting schedules, and variable income can shift outcomes materially. Work with a divorce attorney, financial advisor, and potentially forensic accountant to uncover assets, value them accurately, and negotiate from a position of strength in understanding. Don’t let complexity cost you; it can be overwhelming so if the numbers are big, get help. 

Understand everything! Be nice and be confident. 

For illustrative purposes, and in order to keep the examples flowing and easier to understand, we’ll: 

1. Use Company DIVR that has a current stock price of $200. 
2. Let’s assume the husband works in tech and is highly compensated.