Stock Options, RSUs, and Deferred Compensation in a Michigan Divorce

Executive compensation packages have grown far more complex than a salary and a bonus. Stock options, restricted stock units, performance shares, employee stock purchase plans, and deferred compensation arrangements now represent a significant — sometimes the largest — component of an executive's total compensation. In a Michigan divorce, every one of these instruments is potentially subject to equitable division.

The challenge is that these assets do not appear on a single statement, do not have a single easily determined value, and often have not yet vested or been paid. Understanding how Michigan courts classify and divide equity compensation is essential for anyone going through a high-asset divorce.

What Counts as Marital Property

Under Michigan's equitable distribution framework (MCL 552.19), marital property includes all assets acquired or earned during the marriage. For executive compensation, this means:

Stock options — the right to purchase company stock at a predetermined price. Options granted during the marriage as compensation for services performed during the marriage are marital property, whether vested or unvested.

Restricted stock units (RSUs) — company stock that vests over time, subject to continued employment. RSUs granted during the marriage are marital property. Even RSUs that will not vest until after the divorce is final may have a marital component.

Performance shares — equity awards that vest based on meeting specific performance targets. These add an additional layer of complexity because vesting depends on company performance, not just the passage of time.

Employee stock purchase plans (ESPPs) — plans that allow employees to purchase company stock at a discount. Shares purchased during the marriage with marital funds are marital property.

Deferred compensation — 409A nonqualified deferred compensation plans, supplemental executive retirement plans (SERPs), and other arrangements that defer payment to a future date. The marital portion is the amount earned or accrued during the marriage.

Phantom stock and stock appreciation rights (SARs) — cash-settled instruments that track stock value without conferring actual ownership. These are marital property to the extent they were earned during the marriage.

The critical principle: if it was earned as compensation for work performed during the marriage, it is marital property — regardless of when it vests, when it can be exercised, or when it is paid.

The Coverture Fraction

The coverture fraction is the primary tool Michigan courts use to determine the marital portion of an equity award that spans both the marriage and a period outside the marriage.

The basic formula:

Marital portion = (Months of marriage during the vesting period) ÷ (Total vesting period in months)

Example

An executive receives an RSU grant with a four-year vesting schedule. The grant date is January 2022. The couple separates in January 2025 — three years into the four-year vest.

• Total vesting period: 48 months
• Months of marriage during vesting: 36 months
• Coverture fraction: 36/48 = 75%
• 75% of the RSU grant is marital property subject to division

If the couple's equitable split is 50/50, the non-employee spouse would be entitled to 37.5% of the total grant (50% of the 75% marital portion).

When the Fraction Gets Complicated

The coverture fraction works cleanly when an award is clearly compensating for services during a defined period. It gets more complicated when:

• Options compensate for past performance and future retention. If a grant is partly a reward for past work and partly an incentive to stay, the coverture analysis requires evidence of the employer's intent.
• Multiple grants vest on different schedules. An executive with annual grants accumulates layers of equity, each with its own vesting timeline and coverture fraction.
• Performance-based vesting adds uncertainty. When vesting depends on hitting targets rather than simply staying employed, the value at the time of divorce may be speculative.

In complex cases, expert testimony from a compensation analyst or forensic accountant is often necessary to properly apply the coverture fraction.

Vested vs. Unvested Awards

The classification of an award as vested or unvested affects how it can be divided.

Vested awards can be valued and divided immediately. Vested stock options can be exercised (or their in-the-money value calculated). Vested RSUs have converted to actual shares with a market price. These are the simpler assets to address.

Unvested awards present a timing problem. They have potential value but cannot yet be accessed. Michigan courts handle this in two ways:

Present value offset. The court assigns a present value to the unvested award — discounted for the risk that it may never vest (forfeiture risk) and the time value of money — and offsets it with other marital assets. The employee spouse keeps all the equity; the non-employee spouse receives other assets of equivalent value. This approach provides a clean break but requires agreeing on a discount rate.

"If, as, and when" distribution. The court orders that the non-employee spouse will receive their marital share of each tranche if, as, and when it vests. If the employee leaves the company and the unvested awards are forfeited, the non-employee spouse receives nothing from those tranches. This approach shares the risk but creates an ongoing obligation and requires monitoring.

Each approach has trade-offs. The present value method provides certainty but may over- or under-compensate one party. The "if, as, and when" method is more precise but extends the financial relationship between divorced spouses.

QDROs and Division Mechanics

Dividing equity compensation requires the right legal instrument, and the mechanism depends on the type of plan.

Qualified plans (401(k), pension, profit-sharing) are divided through a Qualified Domestic Relations Order (QDRO) — a court order that directs the plan administrator to pay a portion of the participant's benefit to the alternate payee. A properly drafted QDRO allows the transfer without triggering early withdrawal penalties or immediate taxation.

Nonqualified deferred compensation (409A plans, SERPs, excess benefit plans) cannot be divided by QDRO because they are not governed by ERISA. These require a separate domestic relations order or a provision in the divorce judgment directing payments. The plan's specific terms control what is permissible — some plans allow direct distributions to an alternate payee, while others require the participant to receive the funds and then pay the other spouse.

Stock options and RSUs are typically addressed in the divorce judgment itself. The judgment specifies the non-employee spouse's share and the mechanism for transfer — whether through a direct transfer of shares, a constructive trust, or a payment obligation when the awards are exercised or vest.

ESPPs may require the employee spouse to continue participating (or not) based on the terms of the judgment. Shares already purchased are divided like any other marital asset.

Tax Traps

Equity compensation creates tax issues that can significantly affect the real value of what each spouse receives. Ignoring the tax implications leads to an unequal division that only becomes apparent when the tax bill arrives.

Who pays tax on exercised options? The employee spouse is typically the taxpayer when options are exercised — the spread between the exercise price and the market price is taxed as ordinary income. If the non-employee spouse is to receive a share of the proceeds, the judgment should specify whether the payment is gross or net of taxes.

AMT exposure. Incentive stock options (ISOs) can trigger the Alternative Minimum Tax (AMT) upon exercise, even before the underlying shares are sold. This creates a phantom tax liability that must be accounted for in the division.

RSU taxation. RSUs are taxed as ordinary income upon vesting. The employer withholds taxes at vesting, reducing the net shares received. The division should account for the after-tax value, not the gross number of shares.

Deferred compensation timing. Distributions from nonqualified deferred compensation plans are taxed as ordinary income when received. The value assigned at divorce is a pre-tax number — the actual after-tax value may be 40-50% less depending on the executive's income level.

Capital gains on subsequent appreciation. Shares received through equity compensation have a cost basis. If the shares appreciate after division and are later sold, the selling spouse pays capital gains tax. The initial division should consider the embedded tax liability.

What to Bring to Your Attorney

If you or your spouse hold equity compensation and are facing divorce, gather these documents before your first meeting:

• Grant letters for all stock option, RSU, and performance share awards — current and historical
• Vesting schedules showing the timeline and conditions for each grant
• Plan documents — the full plan document (not just the summary) for each equity plan
• Brokerage statements showing shares held, options exercised, and transaction history
• Deferred compensation plan documents and annual benefit statements
• Employment agreements that reference compensation terms, change-of-control provisions, or post-termination treatment of equity
• W-2s and tax returns for the last 3-5 years — equity compensation appears in Box 12 and on Form 3921/3922
• Pay stubs showing current withholding for RSU vesting and ESPP contributions

The more complete the documentation, the more accurately your attorney and financial expert can identify, classify, and value the equity compensation at stake.

The Bottom Line

Equity compensation in a Michigan divorce requires specialized knowledge that goes beyond standard property division. The coverture fraction, the choice between present value and "if, as, and when" distribution, the tax implications, and the plan-specific division mechanics all affect the outcome.

If you or your spouse hold stock options, RSUs, or deferred compensation and are considering divorce in Oakland County or Southeast Michigan, the valuation and division of these assets should be addressed early in the case — before strategic decisions are made that affect the overall settlement.