Restricted Stock Units Are Presumed to Be Earned Over the Period Between Grant and Vesting, and the Proportion of RSUs Acquired Is the Proportion of Time Between Grant and Decree of Separation that Is Marital – Published Opinion from Supreme Court of Ky.

Normandin v. Normandin

Questions Presented: Marital Dissolution. Restricted Stock Units. Trial court improperly classified restricted stock units (RSUs) as entirely nonmarital property. To appropriately classify such assets the trial court applies a presumption that the RSUs are earned over the period between grant and vesting, and the proportion of RSUs acquired for purposes of marital classification is the proportion of time between grant and decree of separation that is marital. This presumption may be rebutted by the parties. Because trial court did not include RSU income in the income calculation for child support, the child support calculation is also reversed. However, trial court’s determination of the wife’s reasonable needs and the amount of ordered maintenance was not an abuse of discretion.

Oldham Circuit Court

In a dissolution of marriage action, Husband, employed by Humana, earned incentive-based income, including restricted stock units (RSUs), which were usually granted annually and vested to the employee after three years. Prior to vesting, the RSUs were subject to restrictions, unavailable to the employee, and non-transferable until such restrictions lapsed and vesting occurred. The primary restriction was continued employment.

The parties also contested classification as marital or nonmarital an interest in Husband’s 401(k) and a plot of land in Wyoming. The 401(k) consisted of contributions from employment both prior to and during the marriage. Husband testified that he transferred his premarital retirement funds into his Humana account and claimed that $77,000 was the nonmarital value of the account. Wife argued that Husband did not sufficiently prove the nonmarital interest. The plot of land was purchased prior to the marriage with Wife paying the initial down payment of $5,000. Husband testified that he reimbursed Wife for the down payment. They both argued that a portion of the land should be their nonmarital property.

Family Court found all proceeds from the unvested RSUs to be Husband’s nonmarital property, and it did not include them in calculating his income for maintenance or child support. It accepted the $77,000 nonmartial value for the 401(k) account, and it found that neither party presented sufficient evidence to a nonmarital claim to the plot of land. Family Court awarded Wife $1,500 per month in maintenance for 48 months, after finding that Wife’s reasonable needs were $6,000 per month and considering her nonmarital property, the martial property awarded to her, and her ability to become employed. Regarding child support, Family Court found that the parties’ monthly adjusted income was above the statutory guidelines and refused to adjust upward.

Wife appealed, disputing the classification of the RSUs, the retirement account, and the plot of land, the calculation of maintenance and child support, and the denial of attorney’s fees. The Court of Appeals of Kentucky affirmed Family Court in full. Wife sought discretionary review of the classification of the RSUs, the 401(k), and the plot of land and the calculation of maintenance and child support.

The Supreme Court found that RSUs are a form of equity-based compensation under which the issuer company promises to deliver whole shares of stock of the company in the future to an employee at no cost to the employee, if pre-specified vesting ad distribution conditions are satisfied. It held that, as a default rule, RSUs are earned over the period between grant and vesting. The proportion of the RSUs acquired for classification is the proportion of time between grant and decree of separation that is marital. This presumption may be overcome by offering contrary evidence, which may include appropriate plan documents, such as SEC filings, plan prospectus, or grant documents. RSUs are analogous to contingency fee contracts, which may represent both marital and nonmarital property, and the trial court must determine whether and to what extent they were granted as compensation for service prior to the grant versus as an incentive for the employee’s future services. The critical issue is the extent to which the anticipated benefits will have been generated by the mutual effort of the parties.

In this matter, the RSUs were awarded in February of a given year, vesting three years later. They were reported as ordinary income on Husband’s W-2 in the vesting year and taxed in the same year. Husband testified that the grants were a means of hiring and retention. Thus, the Court found no reason to disturb the general rule that the RSUs were a form of deferred compensation.

The Supreme Court held that Family Court incorrectly calculated the parties’ combined monthly adjusted gross income. Gross income includes, inter alia, wages, bonuses, and capital gains. Family Court considered only Husband’s base salary when calculating his income and did not consider the RSUs as part of his income. The Court must consider all income proven by substantial evidence. The party seeking to use a different income bears the burden of proving a different income. Family Court should have considered the RSUs deferred marital income and added the income proportionally to each spouse’s gross monthly income.

The Supreme Court held that Family Court did not abuse its discretion in its maintenance award. Family Court found that Wife’s reasonable needs were $6,000 per month, that she was capable of earning $1,733 per month and had personal property valued at $700,000. The trial court is not required to delineate every factor in its decision. Family Court correctly considered Wife’s independent assets and correctly addressed Wife’s inability to return immediately to the job market. Family Court was not required to analyze Husband’s income when calculating the maintenance payment, only to consider his ability to provide for himself and make the payments ordered.

Digested by Nathan R. Hardymon

Recent Posts

Lady Justice
Evidence of Abuse of Non-Subject-Matter Children Properly Admitted; Cabinet Made Reasonable Efforts at Reunification – Published Opinion from Supreme Court of Ky.
April 12, 2021
ICPC Does Not Require a Home Study for a Noncustodial Parent Who Is Not the Subject of Allegations or Findings of Abuse or Neglect – Published Opinion from Supreme Court of Ky.
March 29, 2021
UCCJEA Does Not Apply to Adoption Proceedings; Granting of Adoption Petition Affirmed – Published Opinion from Ky. Court of Appeals
March 22, 2021