Stock Options, RSUs, and Deferred Compensation in Colorado Divorce
If equity compensation is a significant part of the household income, your divorce has a layer of complexity that most cases don’t. Stock options, restricted stock units, performance shares, deferred compensation plans—each one sits at the intersection of employment law, tax law, and family law. Getting the division wrong isn’t a minor error. It can cost you the equivalent of a year’s salary or more.
The Coverture Fraction
Not all equity compensation is marital property. Options granted before the marriage that vest during it—or granted during the marriage that vest after separation—are only partially marital. The coverture fraction determines the marital portion: the ratio of time the option was held during the marriage to the total period from grant to vesting.
The calculation depends on whether the options were granted for past service, future service, or retention. A retention grant that vests over four years and was awarded two years before separation has a different coverture analysis than a performance-based grant tied to future milestones. The characterization matters, and it’s frequently contested.
Valuation
Vested, in-the-money options have a clear current value: market price minus exercise price. Unvested options are harder. They have potential value, but that potential depends on the stock price at vesting, continued employment, and performance conditions. Courts handle this in two ways: present-value division using pricing models like Black-Scholes, or deferred distribution—the “if, as, and when” approach where the non-employee spouse receives their marital share when the options are actually exercised.
Each approach has tradeoffs. Present value gives certainty now but requires assumptions about future stock performance. Deferred distribution tracks actual outcomes but creates an ongoing financial tie between the parties.
The Tax Trap
Stock options are taxed as ordinary income when exercised. RSUs are taxed when they vest. If you divide these assets without modeling the embedded tax liability, one spouse gets an asset that’s worth significantly less than its face value. A $200,000 RSU vesting event might net $130,000 after federal and state taxes. If that wasn’t accounted for in the division, someone got a bad deal.
This is technical work. At Burnham Law, we work with financial experts who specialize in equity compensation to ensure these assets are properly identified, classified, valued, and divided. The margin for error is measured in six figures.
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