RSUs and Stock Options in California Divorce Mediation

In a California divorce, RSUs and stock options earned through work during the marriage are generally community property, and the parts earned after the date of separation are the employee spouse's separate property. Because a single grant often vests across those dates, it is usually split by a time-based formula. In mediation, you and your spouse can agree on how that split and the division work.

Most people facing this question are looking at a vesting schedule, a grant letter and a calendar, and trying to work out what any of it means for the divorce. One of you may hold the equity and wonder how much of it is still "yours." The other may be unsure whether shares that haven't vested yet count at all. Both of you may simply want a fair answer you can reach together, without handing the question to a judge.

This article walks through what RSUs and stock options are, how California law sorts them into community and separate property, why the date of separation carries so much weight, what must be disclosed, and how mediation can be used to work out the division. It explains the law in general terms. How it applies to your grants depends on your documents and dates.

What RSUs and Stock Options Are, and Why California Divorce Law Treats Them Differently

A restricted stock unit, or RSU, is an employer's promise to deliver shares of company stock once certain vesting conditions are met. Those conditions are usually tied to time, meaning continued employment for a set period, and sometimes to performance goals. Until an RSU vests, the employee holds a promise, not the shares.

A stock option is different. It is the right to buy employer stock at a fixed price, called the grant price or strike price, during a set window of time. Options usually become exercisable as they vest. Exercising means the employee affirmatively chooses to buy the shares at the strike price.

The practical difference matters in a divorce. RSUs turn into shares automatically on vesting. Options require a decision to exercise, and they have value only when the market price of the stock is above the strike price. An option can be fully vested and still worth nothing on a given day.

California starts from a simple rule. Under Family Code section 760, "Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property." Community property is property that belongs to both spouses together. On the other side of the line, Family Code section 771 says the earnings and accumulations of a spouse after the date of separation are that spouse's separate property, meaning property that belongs to one spouse alone.

Equity compensation tends to sit on both sides of that line at once. A grant might be made during the marriage but vest partly before separation and partly after. A grant made before the marriage might vest during it. So the question is rarely "vested is community, unvested is separate." The usual work is to lay the vesting schedule against the date of marriage and the date of separation and see where each piece falls.

Characterizing RSUs and Stock Options: Community, Separate, or Mixed?

"Characterization" is the legal word for deciding whether an asset is community, separate, or partly each. For equity, the central question is what the grant was meant to pay for: work already done, work still to come, or both.

California appellate courts have answered that question with what is called a time rule. The foundational case is In re Marriage of Hug (1984), which addressed stock options granted partly to reward past service and partly to encourage future service. Because the options reflected work going back to the start of the employment, the approach in Hug counts time from the beginning of employment. The community fraction is the period from the start of employment to the date of separation, divided by the period from the start of employment to the date the option becomes exercisable.

A second case, In re Marriage of Nelson (1986), addressed options granted to compensate future service only. There, the count starts at the grant date instead. The community fraction is the period from the grant date to the date of separation, divided by the period from the grant date to the date the option becomes exercisable. The difference between the two approaches is the starting point of the measurement, and that difference can change the result noticeably.

These formulas are applied tranche by tranche. A tranche is one portion of a grant that vests on a particular date, such as the shares that vest after year one, year two, and so on. Each tranche can have its own community fraction. The cases treat these formulas as tools for reaching a fair allocation, not as the only methods a court may use, and which approach fits depends on the purpose of the grant as shown by the employer's plan documents, the grant agreement and the circumstances around the grant. That is one reason those documents are central to the disclosure discussed below.

The same time-rule reasoning is commonly adapted to RSUs, using the vesting schedule in place of the exercise date. The broad patterns look like this:

• A tranche granted and fully vested before the marriage is generally the separate property of the employee spouse.
• A tranche granted and fully vested during the marriage, before separation, is generally community property.
• A tranche whose vesting period straddles the date of marriage or the date of separation is mixed, part community and part separate, and is apportioned.

That mixed result surprises many couples. A single RSU grant can be partly shared and partly one spouse's own, and the split can differ from one vesting date to the next.

The Date of Separation and Its Effect on Unvested Equity

Family Code section 70 defines the date of separation this way:

"'Date of separation' means the date that a complete and final break in the marital relationship has occurred, as evidenced by both of the following: (1) The spouse has expressed to the other spouse the intent to end the marriage. (2) The conduct of the spouse is consistent with the intent to end the marriage."

Both pieces must be present: words expressing the intent to end the marriage, and conduct that matches. The statute also says the court considers all relevant evidence in deciding the date.

For equity, this date is the cutoff. Under section 771, vesting that reflects work after the date of separation produces separate property for the employee spouse. Every month that moves the date earlier or later shifts part of each straddling tranche from one column to the other.

An illustration, without numbers attached to value: suppose an RSU grant made during the marriage vests over four years, and the date of separation falls two years in. Under a grant-date time rule, roughly half of that grant would be community and roughly half separate. The exact split for each tranche depends on the formula used and the precise dates.

It is easy to see why couples with equity sometimes view this date differently. An earlier date tends to leave more of the equity as separate property, and a later date tends to leave more as community property. Recognizing that tension openly is often the first step toward talking it through calmly.

The date of separation is a factual question. In mediation, you and your spouse can agree on it, and many couples write that agreed date into their settlement. If you cannot agree, the court decides it based on the evidence. Nothing in this article suggests that any particular date is the right one in a given marriage.

Financial Disclosure Duties When Equity Is Part of the Marital Estate

Family Code section 2100 sets out California's policy that a "full and accurate disclosure of all assets and liabilities in which one or both parties have or may have an interest must be made in the early stages" of a divorce, together with disclosure of income and expenses. Each spouse also has a continuing duty to update that disclosure when there are material changes. Mediating does not remove, shorten or informally replace this duty. It applies the same way whether a couple mediates or goes to court.

The first step is the preliminary declaration of disclosure under Family Code section 2104. Each spouse serves it, under penalty of perjury, with the petition or response or within 60 days of filing it, unless the parties extend that time by written agreement or the court extends it by order. When the petitioner served the summons and petition by publication or posting under a court order and the respondent files a response before a default judgment is entered, the petitioner has 30 days from that response. The declaration identifies all assets and liabilities, whatever their character, and includes the tax returns filed in the prior two years.

The second step is the final declaration of disclosure under Family Code section 2105. Except by court order for good cause, the final declaration and a current income and expense declaration are due before or at the time the parties enter into an agreement resolving property or support issues other than temporary support, or, if the case goes to trial, no later than 45 days before the first assigned trial date. The final declaration can be waived only by both spouses together, never by one alone. Under section 2105(d), a mutual waiver is executed under penalty of perjury in open court or by separate stipulation, and it must include each of these representations: both spouses have completed and exchanged their preliminary declarations under section 2104; both have completed and exchanged a current income and expense declaration that includes all material facts about earnings, accumulations and expenses; and both have fully complied with section 2102 and fully augmented their preliminary declarations, including the characterization of all assets and liabilities, the valuation of assets claimed as community, and the amounts of claimed community obligations.

For equity compensation, a thorough disclosure typically includes:

• Grant agreements for every RSU and option grant
• The employer's stock plan documents
• Current vesting schedules, showing granted, vested and unvested amounts by tranche
• Exercise (strike) prices for options and their expiration dates
• Any blackout periods, transfer limits or other restrictions on selling or moving the shares

Incomplete disclosure carries real consequences. Sections 2104 and 2105 both state that perjury on a declaration of disclosure may be grounds for setting aside the judgment, or parts of it, in addition to other remedies the law provides. An agreement built on missing equity information may not hold. For a fuller look at how these rules shape asset division generally, see the overview of property division mediation.

How Mediation Works for RSU and Stock Option Division

Under Evidence Code section 1115, mediation is "a process in which a neutral person or persons facilitate communication between the disputants to assist them in reaching a mutually acceptable agreement." The mediator is that neutral person. A mediator does not represent either spouse, does not advocate for either spouse, and does not decide anything for you. The decisions stay with the two of you.

Confidentiality is part of what makes candid conversation possible. Evidence Code section 1119 generally provides that what is said and written for the purpose of, in the course of, or pursuant to a mediation or a mediation consultation is not admissible or subject to discovery in later noncriminal proceedings, and that communications between participants stay confidential, except as the Evidence Code's mediation chapter otherwise provides. That protection is not absolute. Under Evidence Code section 1123, a written settlement agreement signed by the settling parties can be admitted or disclosed if it says it is admissible or subject to disclosure, if it says it is enforceable or binding, if all parties expressly agree to its disclosure, or if it is used to show fraud, duress or illegality relevant to an issue in dispute.

Section 1115(c) also defines a mediation consultation: a communication between a person and a mediator for the purpose of initiating, considering or reconvening a mediation or retaining the mediator.

With equity on the table, mediation gives you and your spouse room to agree on the questions that otherwise go to a judge, including:

• Which time-rule approach fits each grant
• The date of separation
• How to value unvested RSUs, for example using a grant-date price, a trailing average price, or a negotiated discount for the risk of forfeiture
• Whether to divide shares in kind or offset the equity against other assets
• How taxes on future vesting events will be shared

Either of you may consult or retain your own attorney at any point. Neither of you is required to, and neither of you is barred from doing so. An attorney who represents a spouse in mediation must give that client the printed confidentiality disclosure required by Evidence Code section 1129 as soon as reasonably possible before the client agrees to participate, or as soon as reasonably possible after being retained if retained later, along with a signed acknowledgment.

Mediation produces an agreement, not a court order. For the terms to take effect as orders, the agreement is submitted to the court and incorporated into a judgment. In San Diego County, family law cases are heard by the Superior Court of California, County of San Diego; where a particular case is filed depends on the spouses' circumstances, such as where they live. The judgment ending the marriage also cannot become final until six months after the date the summons and petition are served or the date the respondent appears in the case, whichever occurs first, under Family Code section 2339. The step-by-step path is covered in the guide to the divorce mediation agreement.

Mediation may be less adversarial than litigation, depending on the couple and the issues, but it is not right for every couple. Where there has been domestic violence, coercion or a protective order, safety comes first, and no one is encouraged to mediate with the other spouse.

Practical Considerations When Equity Compensation Is on the Table

Valuation timing is the first practical question, and it is separate from the date of separation. Under Family Code section 2552, the court values assets and liabilities as near as practicable to the time of trial, and on 30 days' notice by the moving party, may for good cause value all or part of them at a date after separation and before trial. The date of separation sorts what is community; valuation timing decides what that community share is worth. For stock that can move sharply, couples in mediation often agree on a specific valuation date or method so both know exactly what they are dividing. If a judge divides the estate, Family Code section 2550 generally requires an equal division, except on the written agreement of the parties or their oral stipulation in open court, or as the division otherwise provides.

Vested RSUs are the simplest piece. Once shares are delivered, they are characterized like any other asset. You and your spouse can divide the shares in kind, have one spouse buy out the other's share, or offset the community's interest against other assets such as cash or retirement accounts.

Unvested RSUs and options are often handled with an "if, as, and when" arrangement. Rather than paying a lump sum today for shares that may never vest, the non-employee spouse receives the community share of each tranche if and when it actually vests and is delivered. This structure naturally accounts for forfeiture risk, since unvested RSUs are typically forfeited if the employee spouse leaves the company. Some couples prefer a present buyout instead and negotiate a discount to reflect that risk.

Taxes deserve early attention. Vesting events after the judgment are generally reported as income to the employee spouse, even when part of the shares belong to the community. How that tax burden is shared between you is a negotiable term, and many agreements spell it out tranche by tranche.

Options raise a mechanical problem. A non-employee spouse generally cannot hold the options directly, so the employee spouse often holds them and exercises on the other's behalf, or a domestic relations order or similar mechanism is used where the plan allows. Many couples check what the employer's plan actually permits before finalizing terms, since an agreement the plan cannot carry out creates new problems.

Where one spouse also owns a business or professional practice, its value can include goodwill, and that value is decided on the evidence, often with experts. The page on business owner divorce mediation discusses that separately.

Reimbursement can also come up. Under Family Code section 2640(b), if one spouse used traceable separate-property funds to exercise options or buy shares that became community property, that spouse is reimbursed for the contribution unless the spouse has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver. The reimbursement is paid without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division. Equity is also one part of a broader picture; RSU income can bear on spousal support mediation as well.

If You'd Like to Talk Through Your Equity Compensation

Equity is one of the areas where the details decide everything: the grant language, the vesting dates, the date of separation and the plan's own rules all shape what the community share looks like. A consultation is a place to go over how mediation could handle those pieces for your grants, which documents tend to matter most, and how an "if, as, and when" arrangement or a buyout might fit the rest of your property. Simple Divorce Mediation works with couples in San Diego County and, through online mediation, with couples anywhere in California. If one of you is still weighing whether mediation fits your situation at all, that is a fair question to raise too.

To talk through how these rules apply to your situation, call Simple Divorce Mediation at 858-330-1378 for a joint mediation consultation.