For executives at Regions Financial, medical professionals at UAB, or leaders at Encompass Health, compensation has evolved far beyond a simple salary. In Birmingham’s high-stakes corporate environment, wealth is increasingly tied to complex equity packages, specifically Stock Options and Restricted Stock Units (RSUs). These “golden handcuffs” are designed to keep you tethered to your company, but when a marriage dissolves, they often become the most volatile and contentious piece of the financial puzzle.

Unlike a bank account in Mountain Brook or a vacation home on Lake Martin, you cannot simply split a stock option down the middle. Their value fluctuates with the market, their tax rules are dense, and frequently, you may not even own them yet.

Are Unvested Stock Options and RSUs Considered Marital Property in Alabama?

In Alabama, stock options and RSUs are generally considered marital property if they were granted for services performed during the marriage. However, if the court determines they were granted solely as an incentive for future employment post-divorce, the unvested portion may be classified as separate property.

Determining ownership is the first hurdle in an Alabama divorce, particularly when dealing with complex assets like stock options and Restricted Stock Units (RSUs) in high-asset cases. Because Alabama operates under the principle of “equitable distribution,” the court’s primary objective is to divide marital assets fairly, which, crucially, does not automatically equate to an equal 50/50 split.

The judge, whether presiding over the Jefferson County Domestic Relations Division or the Shelby County Circuit Court, will delve into the specific “purpose” underlying the grant of the equity to ascertain which portion legally belongs to the marriage estate and which might be classified as separate property.

A common analysis applied by the courts differentiates grants based on the timeline of the work compensated:

Past Performance Grants: If your RSUs or stock options were awarded explicitly as a bonus, recognition, or compensation for a successful prior year of service or for meeting specific performance metrics at a company such as Vulcan Materials, they are generally viewed as compensation for work completed during the marriage. Consequently, these grants are typically categorized as 100% marital property, even if the awards have not yet fully vested or been exercised by the time the divorce complaint is filed.
Future Retention Grants (Golden Handcuffs): Conversely, if you received a grant today that is explicitly structured to vest over a significant future period—for instance, over the next four years—with the clear stated intent to encourage you to stay with the firm and perform future labor, a portion of that grant can be argued as separate property. The underlying logic is that this equity award is functionally “paying” for labor and services you will perform after the divorce is final, thereby creating non-marital value.

To apply this analysis, the court meticulously reviews several key factors:

The Vesting Schedule: Courts analyze the structure of the vesting to apply a precise time-based division formula, looking closely at whether the vesting is a “cliff” (where all shares vest on a single future date) or “graded” (where shares vest incrementally over multiple dates).
The Grant Date: The date the equity was initially awarded is critical. Options granted before the marriage but vesting during the marriage require an extremely careful tracing and valuation process to separate the appreciation and vesting that occurred during the marriage (marital property) from the initial grant value (often separate property).
Purpose of the Award: The most influential factor is often the language within the employment contract, award agreement, or corporate plan documents. These documents often explicitly state whether a grant is designated for “past services,” “performance compensation,” or “future incentives/retention,” providing a critical piece of evidence for the court’s classification decision.

How Are These Assets Valued and Divided Without Selling Them?

The two primary methods for dividing equity compensation are “offsetting,” where one spouse keeps the options, and the other receives different assets of equal value, or “deferred distribution,” where the employee holds the shares in trust for the ex-spouse until they vest.

Dividing liquid cash is straightforward; dividing a volatile RSU is not. For a family in Vestavia Hills or Hoover, determining the value of these assets often requires a forensic accountant. . We typically approach this in one of two ways:

Method 1: The Buyout (Offsetting)

In this scenario, we determine the present value of the stock options—often using complex models like Black-Scholes for options or intrinsic value for RSUs. The employee spouse retains 100% of the equity but “buys out” the other spouse by trading other assets, such as equity in the marital home or a larger share of a retirement account.

Pros: It creates a “clean break” with no ongoing financial ties between ex-spouses.
Cons: It requires the employee’s spouse to assume the full risk of the stock price dropping after the divorce.

Method 2: Deferred Distribution (If, As, and When)

If the stock price is too volatile or the estate lacks enough liquid cash for a buyout, the court may order a “constructive trust”. You keep the options in your name (since they are usually non-transferable), but the divorce decree mandates that when the shares vest and are sold, you must pay your ex-spouse their agreed-upon percentage.

Pros: Both parties share the risk and reward of the market performance.
Cons: It keeps the parties financially entangled for years after the divorce is final.

Crucial Considerations for Division:

Tax Impact: RSUs are taxed as ordinary income upon vesting. If you pay your ex-spouse cash now for RSUs that vest later, you could be stuck with the entire tax bill. We ensure settlements account for the after-tax value.
Insider Trading Rules: Executives at public companies are often subject to “blackout periods” where they cannot sell stock. Your divorce agreement must reflect these SEC restrictions.
Risk of Forfeiture: If you leave your job, unvested options typically disappear. The agreement must specify what happens to the non-employee spouse’s share in this “worst-case” scenario.

What Happens if the Stock Price Crashes After the Divorce?

If you chose the “offset” method, the spouse who kept the stock absorbs the entire loss; if you chose “deferred distribution,” both spouses share the loss proportionally, meaning the payout to the non-employee spouse would simply be lower.

This scenario is a frequent concern for our clients, given the market’s volatility. Imagine you agreed to a buyout based on a stock price of $100 per share, trading your interest in the family home for the stock portfolio. If the market corrects and the stock drops to $50 per share a year later, the spouse who received the house is secure, while the spouse who kept the stock has lost significant value.

Alabama courts determine fairness at the time of the divorce. They are generally unwilling to reopen a settled property division just because the market shifted. This makes the choice of division method—and the protective clauses we draft—absolutely critical.

The “Clean Break” Risk: By taking the buyout, you are effectively betting on your company. If the stock soars, you reap the reward without sharing. If it tanks, you bear the loss alone.
The “Shared Risk” Approach: With deferred distribution, if the stock becomes worthless, the non-employee spouse receives nothing, and neither party “wins” at the other’s expense.

Protective Strategies We Employ:

Cap and Floor Clauses: We can negotiate limits on the maximum or minimum payout to prevent extreme financial disparity due to market swings.
Clawback Provisions: If the company “claws back” a bonus or equity grant due to financial restatements, the agreement should specify that the non-employee spouse must return their portion.

Frequently Asked Questions (FAQs)

Do I have to pay taxes on RSUs transferred to my spouse in a divorce?

Generally, transfers of property incident to divorce are not immediately taxable. However, because stock options and RSUs are taxed as income upon vesting (not just capital gains), the employee’s spouse is usually the one who receives the tax form. The divorce decree must explicitly calculate and deduct this tax liability before the non-employee spouse receives their share to prevent the employee from being unfairly penalized.

Does the “10-Year Rule” for Social Security affect stock option division?

No, the 10-year rule applies to eligibility for Social Security spousal benefits, not the division of marital assets. Whether you were married for 5 years or 25 years, any stock options or RSUs acquired during the marriage are subject to equitable distribution under Alabama law.

Can I keep my unvested stock options if I started the job before we got married?

Likely yes, for the portion that vested before the marriage. However, if the options vested during the marriage, or if you mixed the proceeds into a joint account (commingling), they may have “transmuted” into marital property. Tracing the separate portion requires a careful analysis of grant dates versus vesting schedules.

How does a “Constructive Trust” work for stock options?

A constructive trust is a legal arrangement where the court orders the employee spouse to hold the non-employee spouse’s share of the options as a trustee. You legally own the account, but you have a fiduciary duty to manage their portion and pay them immediately upon exercise or vesting, protecting their interest without violating the company’s non-transfer rules.

Are stock options considered income for alimony or assets for division?

This presents a risk of “double-dipping.” Alabama courts generally try to avoid counting the same funds as both an asset (for property division) and an income stream (for calculating alimony). It is critical to clearly categorize which grants are being divided as property so they are not also used to inflate your income for spousal support calculations.

What if my company is private and the stock has no market price?

Valuing private equity is complex and often requires a “fair value” determination rather than a “fair market value” one. We often use intrinsic value or hire a valuation expert to determine a price. Alternatively, the “deferred distribution” method is safer here, as it waits until a liquidity event (like an IPO or acquisition) to determine the actual value.

Do I need a forensic accountant for my divorce?

If you have a high-asset estate with commingled funds, complex executive compensation, or business interests, yes. A forensic accountant traces separate vs. marital assets and calculates the true net value of options after taxes, ensuring you do not overpay (or under-receive) in the settlement.

Which court will handle my high-asset divorce?

If you live in Jefferson County (including Birmingham, Mountain Brook, and Hoover), your case will likely be heard in the Domestic Relations Division at the Birmingham or Bessemer courthouse. If you reside in Shelby County (such as Pelham, Alabaster, or Greystone), your case will be heard at the Shelby County Courthouse in Columbiana. Each jurisdiction has distinct procedural nuances that we navigate daily.

Secure Your Financial Future

Whether you are an executive at a major Birmingham corporation or the spouse who supported that success, your financial future depends on how these complex assets are handled today. Don’t leave your stock portfolio to chance or a “standard” calculation. Kirk Drennan Law provides the sophisticated, discreet, and strategic counsel required for high-asset divorces in Alabama. We know the difference between a simple stock trade and a complex executive compensation package, and we know how to protect your interests.

Contact us today at (205) 953-1424 to schedule a confidential consultation. Let us help you navigate the complexities of property division so you can move forward with clarity and confidence.

How Are Stock Options and RSUs Divided in Alabama High-Asset Divorces?