Episode 150

Holly Draper welcomes back Guy Rodgers, a board-certified family lawyer who shifted his practice in 2008 from full-time litigation to financial advisory work focused almost entirely on divorce litigation support. Holly invited Guy back because even experienced attorneys struggle when a case involves restricted stock units, or RSUs.

Guy frames the conversation around the case behind his CLE presentation, “The $14 Million Illusion”: a client who saw $14 million in unvested RSUs on her executive husband’s statements — some tranches vesting as far as 25 years out — and counted on her share as her retirement.

Guy explains what RSUs actually are and how they differ from stock options and employee stock purchase plans. He walks through the life cycle of a grant, from the corporate decision to award deferred compensation, through the vesting period he compares to a cake “baking in the oven,” to the moment the shares vest and become taxable. He describes the “waterfall effect” of annual grants vesting on overlapping schedules, and why RSUs are true golden handcuffs that can vanish entirely through death, termination, resignation, or a company’s collapse.

The conversation then turns to the practical work: what to request in discovery, including summary plan descriptions, grant letters, vesting schedules, and third-party administrator statements; how to watch for vested shares quietly moved into undisclosed brokerage accounts; and how Texas Family Code § 3.007 and the Berry formula apply to characterizing RSUs month by month. Holly and Guy walk through a visual example showing how to calculate separate and community portions when the marriage covers only part of a vesting period.

Guy closes with valuation and settlement strategy, using the time value of money to explain why he advised his client that $2 million today was worth more than $7 or $8 million in contingent future payouts. He covers how to frame the argument on both sides, why trading RSUs for other assets is almost always better than dividing them, and what decrees must include when there is no other option — clear after-tax language, firm delivery deadlines, and security for payment. He also reveals the surprising ending to the $14 million case, and the one question he now always asks the employee spouse.

In This Episode, You’ll Discover:

The surprise ending to the $14 million case

What an RSU really is

How the RSU life cycle works

The “waterfall effect” of annual grants

Exactly what to request in discovery

How RSUs can disappear

How to characterize RSUs under Texas law

Why face value isn’t present value

Settlement strategies on both sides

Drafting for enforceability

Mentioned in this episode:

• Restricted stock units
• RSU
• Golden handcuffs
• Vesting schedule
• Grant schedule
• Stock options
• Employee stock purchase plan
• ESPP
• Phantom stock
• Deferred compensation
• Summary plan description
• Third-party administrator
• Texas Family Code 3.007
• Berry formula
• Community property apportionment
• Present value
• Time value of money
• Rule of 72
• Constructive trustee
• After-tax distribution
• Decree drafting
• Enforceability

Transcript

Episode 150 | Guy Rodgers: $2 Million Now or $8 Million Later…Perhaps: RSU’s

Guy Rodgers: So, you know, I’m old, so I think of Wimpy on Popeye would always say, “I’ll gladly pay you Tuesday for a hamburger today.” Now, even as kids, we knew that somehow that didn’t sit right. That’s because the value of something today is different than the value of it in the future

Announcer: You’re listening to the Texas Family Law Insiders Podcast, your source for the latest news and trends in family law in the state of Texas.

Now, here’s your host, attorney Holly Draper

Holly Draper: Welcome back to the Texas Family Law Insiders podcast. Today, I’m joined once again by Guy Rodgers, who has been a podcast guest before. But for anyone who maybe missed your first episode or doesn’t know you, why don’t you start and tell us a little bit about yourself?

Guy Rodgers: Thanks for having me, first off, Holly. A little bit about me is I’m a, a unique creature in our environment. I am a board-certified family lawyer, and I prep for today, I was trying to remember what year that was, and it is 25 years that I’ve been board certified. But so 2001, board certified in family law, licensed in Texas since 1992. Primarily, I had a litigation practice and, and mostly family law in the last many years.

In 2008, I switched my practice from full-time litigation to full-time financial advisory, almost exclusively as litigation support. I have my Series 7, my 6, my 66, my 24, all, all the alphabet soup, all of those things. But so I manage right now about 200 billion. Almost all of our clients have been lawyer referrals.

We’ve been really blessed by the bar, especially starting in 2008. It was a great time. But so that’s the, that’s my practice. Almost all of my practice now is divorce referral work, consulting during the cases to try to help people figure out the pros and cons of any various settlement offers, depending on the position of the client, what the client’s wanting to achieve, time horizons, age, liquidity, whatever, and try to structure the, the MSA or the proposed decree or whatever in a way that helps the client achieve that goal

Holly Draper: So I asked you to come back on the podcast today because I have noticed some younger lawyers, but also some more experienced lawyers, who really struggle when a case involves RSUs, restricted stock units.

So I thought this would be a great topic for a podcast, and hopefully we can help educate the attorneys out there so that the next time this shows up in one of their cases, they know what they are doing just a little bit better.

Guy Rodgers: Right.

Holly Draper: And I know you have presented on this topic for CLEs and, you know, we’re opting not to use the PowerPoint deck just because I know a lot of our listeners might only be listening and not watching this.

We will later have one graphic that we are gonna show, so if you wanna go switch to watching this online, this is your warning. But otherwise, we’ll talk about some things that are in your CLE, and I know you have a slide deck PowerPoint for that, that you are willing to give people if they want it. So feel free to reach out to either one of us and we can help you get that.

Your title on your slide deck is The $14 Million Illusion. And I know that really shaped how you approach RSU cases. Can you set that case up for us and tell us why that was such a turning point?

Guy Rodgers: Yeah, I’ll set it up. We’ll save the bomb in the case for later, but I’ll set it up. A local lawyer, a North Texas lawyer, incredibly well-respected, a really good business-oriented lawyer that deals with cases like this often, called me and said, “I’ve got a unique one.”

This was a, a family that was from North Texas but residing currently in Brussels, where the, the husband was a C-suite executive for one of the software companies. And his package was very heavily stock-weighted, both on options and RSUs. But this was a little peculiar because his RS schedule, his vesting schedule, had many different tranches as the software company had been sold or acquired and merged, but he had tranches of vesting 25 years out And so from today’s day, and so even earlier from when they were granted.

But 25 remaining years. But the total of all of those grants, if you looked at them and you used current values, was about $14 million. The problem with that was it was contingent on all of these golden handcuff things. But the client, the young lady who was our client, saw $14 million and said, “Hey, that is my retirement.

I’ll be safe and sound for forever.” At the time, she was in her mid to late 40s, and she said, “I’m gonna be set. Each one of these tranches that comes due, I’m gonna have a nice chunk of money, so let’s divide up the rest of everything and I’m gonna count on that 7 million or $8 million,” whatever we determined her share, “to be her future.”

And it was very difficult for us to move her off of that. And so I’ll, I’ll drop the bomb later, but the m- we eventually got so far as the lawyer wrote her a really in-depth CYA letter. And we explained each of the risks, and we’ll go through these in a minute, each of the risks to her that could happen in the middle of this case that could make that money be less valuable or not valuable or unenforceable or all the other things.

And so we had suggested, I did a time value of money calculation, which is very specious. I, I mean it, but it just was trying to give me an idea of what the value of the present value might be. And I told her that if we could get $2 million up front, I would take it rather than 7 or $8 million over the course of that 25 years.

And mind you, there were various tranches that vested over the course of that 25, but a fair amount of those were 10 to 25 years from now. And so I did some time value of money calculations and said, “If we can get 2 million, I’ll take it.” And so we eventually told her our attack would be to ask for four.

And we did that, and eventually that worked. But it took a lot of doing with both of us threatening to withdraw if she wouldn’t acknowledge that we told her it was a horrible mistake to proceed trying to get what she wanted, which was the RSUs with him being the constructive trustee. So that was the framework of the case and, and all of the things that happened on that case, um, before, during, and after changed completely the way I counsel really good lawyers on how to avoid losing that gold card in their pocket.

Holly Draper: So let’s start with the basics. What exactly is an RSU?

Guy Rodgers: So the definition of an RSU is called a restricted stock unit. I have people all the time say, “Oh, so it’s an option?” No, it’s not an option. “So it’s an ESOP?” No, it’s not an ESOP. Those are different things. And so one of the, the key things for me is I’m always telling people, “Get the statements,” right?

Get the freaking statements is almost like one of my catchphrases because we need to be very sure that we’re talking about apples to apples and what it really is, right? So we’ve gotta make sure that if we’re talking about RSUs, we know what that entails. It’s not an option.

I had a, a mediator, former judge call me last night, like at 9:30. Said, “Hey, I’m prepping for my mediation tomorrow, and it has phantom stock. What in the heck is phantom stock?” And so I said, “It’s, it’s…” I said, and this is a judge who knows RSUs well. I said, “Think of it like RSUs,” because they’re very, very similar.

And so a restricted stock unit is a grant, a compensation grant normally, that’s given to someone either for retention, sign on to become an executive normally, or a means of deferred comp profit sharing. That’s one good way to look at it. You hear the term golden handcuffs. These are exactly one of the most predominant golden handcuffs, especially in the tech and military industries. Very predominant. And so think of them as future comp that comes with a whole lot of strings attached.

Holly Draper: Can you walk us through kind of the life cycle of an RSU?

Guy Rodgers: So the very first thing that will happen is there’s, in, in a corporate environment, there’s a discussion about this deferred comp. They’re trying to decide how are we gonna give compensation for risk-taking, for retention, all those things to our executives or our founders. And so that’s the purpose of these.

That discussion is at a corporate level. And then once that is decided on, so you may have clients who’ve been involved in that part of it as well. But once that’s done, it’s pitched to the employees or the founders as a way to give them some security, some benefit for longevity and staying. And normally, they’re on tranches of grants.

So you’ll have a grant, and just say that’s the day the present is handed to you. The present is handed to you. It’s granted to you. That’s what you’ll see on the documents, is a grant schedule. Very important to look for the grant schedule. So there’s a grant, and then there’s kind of a waiting period. Or I tell people it’s like the time it’s in the oven baking, right?

During this time that it’s in the oven baking, you have all these risk factors that can cause a problem with that. But if you live out through the vesting period Then you get the value of those stocks at their current market value, subject to a taxation normally. Normally, you’ll have a third-party vendor like Fidelity or Schwab or Compushare will hold those shares in trust after they’re granted to you, because you don’t get them immediately.

They’re held while they’re baking and while they’re baking, they stay with the third-party vendor. Then once they mature or vest, then you have the decision to make as the recipient what you’re gonna do with them. You can liquidate them that day. Some, um, summary plan, uh, descriptions will allow you to hold onto them, delaying even further your tax event.

But at some point in time you’ll exercise that grant, and you’ll receive those grants as vested, and you just may not then liquidate them. You may just now own the share. When you sell the shares, you’re gonna have liquidation, and maybe liquidation plus capital gains. Probably the most common vesting schedule in most of the industries we deal with is about a five-year vest.

You see some threes, you see lots of fives, and you see some that are longer. What that means is you have a partial granting, uh, for communities along the way, depending on a, a divorce date, but you have like a five-year, in that instance, a five-year schedule from birthday to maturity.

Holly Draper: So I know, like with my 401, for example, for my employees, the vesting schedule gives them a certain percentage each year until they are fully vested. Does it work the same way with RSUs or is it zero and then 100?

Guy Rodgers: Typically, uh, typically, the answer is not always ever, but almost always on a RSU it’s all or nothing. So normally you will receive a vesting on the vesting date and there are no partial vests. And I would say that’s 99% of the plans. But there are some plans that do have some intermediary proportional vesting, but that’s really rare these days.

These days it’s, you, it was granted on January 1st of 2025 and it vests on December 31st, 2030. Five years later is the common number now.

Holly Draper: How common is it for there to be just one grant with one vesting versus repeated grants over a period of time that are gonna have different vesting along the way?

Guy Rodgers: Great question. Almost always, and I always call this grant and vest season, normally it’s February, March, or April, and that’s because it’s at the end of the fiscal year for the company. They evaluate how they did and they’ll have a component in their summary plan description- It says if profits were X, this is how much we’ll put into the RSU pool.

So normally in February, March, April, you’ll have those computations done. And s- so the normal situation, let’s say someone gets 1,000 grants, and they may have grants that are on a one-year, two-year, three-year, four-year, five-year schedule, but the longest tranche of those grant vests in year five. There may be, back to your earlier question, there may be a tranche of them that actually vests in year one, but then you may have another tranche that vests in year two.

But from grant, one grant, you may have five separate tranches maturing in years one, two, three, four, and five.

Holly Draper: But then you can also have multiple grants, so you get a grant-

Guy Rodgers: Almost always you do.

Holly Draper: Yeah.

Guy Rodgers: You’ll, you’ll normally have grants on that anniversary date every year. Meaning, if I had a grant this February, this past February, this coming February, if I’m still with the company and the plans are still the same and the circumstances, I’ll get another slice.

So what’s funny is you will have what I call a waterfall effect. You will have, if you look at a vesting chart and do it on a grid, you’ll have the, the grants from five years ago will be maturing this year. The grants, some grants from four years, some grants from three years, some grants from two years, and even some grants from last year will mature this year, but all on different schedules.

Some of them will be a five-year vest, some will be four, some will be three, some will be two, and some will be one. That will continue to happen. So you have this weird mix-mash of grants and vests and maturities. So you literally have to look at each year’s worth of grants and that year’s vesting chart to determine of this 1,000, of this…

And they’ll give you weird numbers too. Of this 882, certain tranches will vest year one, another tranche will vest year two, another will year three, all the way up to year five. In some instances, nothing will vest until year five. So like your earlier question, do you have partial vests? Normally, you don’t have partial vests.

You have partial granting schedules that will vest, a slice of that grant will vest in that year.

Holly Draper: So How do RSUs differ from stock options or employee stock purchase plan shares?

Guy Rodgers: So employee stock purchase plans or ESOPs are just you have the option out of your paycheck to go every month and buy two additional shares of your Walmart stock if you work at Walmart.

So that’s an ESOP. It’s an employee stock purchase plan, sometimes at a discount, sometimes at a fixed rate, but you have the option to buy those at that rate, and you just own them from day one after you buy them. An option says you can choose to buy these. If my grant price, if my option price is $1,000 a share, and the stock is currently only trading for $100 a share, I’m not buying, because I’m losing $900 a share today.

By the same token, if it’s the other way around, if on the date that I have the option I can buy this stock for 100, ’cause that’s what it was whenever my option was given to me, you can buy up to 100 shares at $100 a share, and the stock price is 1,000, by all means I’m buying them for my $100 a share ’cause I’m gonna make $900 per share of stock.

That’s called in the money or out of the money. If it’s in the money, meaning if you’re in profit, obviously you’re gonna exercise. If you’re not, you’re not gonna do that. It’d be a waste of your money. So those are entirely different programs with entirely different rules, entirely different things for a lawyer to be concerned about in a divorce.

But especially in the tech world, I mean, you’re now in the new tech corridor. If, in the new tech world, RSUs are kind of coin of the realm right now.

Announcer: This episode of the Texas Family Law Insiders Podcast is sponsored by the Draper Law Firm, providing family law appellate representation for non-parent custody cases, jurisdiction issues, property division, standing, conservatorship, possession and access, termination, parental rights, and grandparent access.

For more information, visit draperfirm.com or call 469-715-6801.

Holly Draper: So back to the RSUs. As attorneys, what document should we specifically be asking for so we can see when the grants were, when the vesting happens, all of that information you told us we were gonna need to find?

Guy Rodgers: The first thing is to always ask for all of the summary plan descriptions for every plan available to the employee at their company, and even previous companies if you know them and can get them, because there may have been some, some bird’s nests on the ground, even from a previous employer.

For example, an option that is not expired, right? So you want to get all of those. Get, and you can subpoena those and send a business records affidavit, and they’ll just throw them right out to you because they don’t want to hassle with it It’s easy that way. So that’s probably-

Holly Draper: And who do you subpoena?

Guy Rodgers: I usually sub- uh, I’ll ask for, in, in discovery I’ll ask for the information for the third party administrator, and I’ll send the subpoena to them once I have the correct information for the third party administrator, ’cause that’s who it’s gonna come from anyway.

From the individual, from the employee, you can actually request from them their, all of their statements, and that doesn’t mean your 401K statement. Be very careful about narrowing your request. So make sure r- your request is broad, because if I request a 401K statement, that’s what I’m gonna get. Don’t request just a 401K statement.

Request from all retirement benefits, because that is a benefit, or deferred compensation benefits. So just be very broad in your request. All grant and vest schedules, all option schedules, all actual grant letters, they’ll get a letter saying, “Hey, you know, it’s February the 15th, we’re gonna grant you today 888 shares of XYZ company.” And normally on the, on that letter it’ll tell you the rules that apply to that vent, grant as well.

And they can change. They can change the summary plan description, so next year’s grants may be under different rules. So be sure to pay attention to that as well.

Holly Draper: So when we’re doing discovery, we probably wanna use a very broad date range looking back at how long this person has been working in this sort of a company to try to hit all the grants that may have occurred way back when.

Guy Rodgers: Hold on. Gra- grants probably not. I mean, sure, always be, always be broad, right? Always be broad until they gripe at you for being too broad. But, but grants by their nature normally don’t follow you from one company to another. That is the handcuffed element of that.

I would say in your discovery request, very broad as to current companies. You might get them to list all former companies, and then you go and get the summary plan descriptions from them, see if they have anything that still exists. You can always do a business records affidavit and subpoena of a former company’s personnel office to find out do they have any benefits still existing from the company.

Those are pretty easy ways to do that, and something that you can just have on a standard operating procedure for your staff just to throw those out. They’re pretty easy to do. But your, the nature of your question is really cool because it does show one of the fear factors for lawyers and clients about these RSUs.

They go away. They can go away any number of ways. They can go away by death. So if you have an employee who’s lived out four of the fi- five years he’s supposed to be alive to get this tranche, and very often, by the way, the tranches are heavily weighted on the fifth year, right? The longer you stay, the more it pays.

So in that situation, you could have somebody die and they lose them. They lose all those that apply to that year and thereafter. And so if you’re a spouse trying to get some benefits, be careful. Is your spouse healthy, not healthy? Do they have unhealthy habits, for example? That was one of the things in my case. We had a spouse who was not healthy and was doing a whole lot of things that were not healthy.

In addition, you can lose those by being fired. So if someone is a jerk such that you might be divorcing them because they’re a jerk, they have bad behavior of whatever kind, and they’re being erect- irresponsible and reckless. If they act in that way in their life in general, and they lose their job because of, they’ve also lost that contingent benefit.

So death, firing, quitting. Quitting is huge. So you have several different ways those can vanish. If the company dissolves or gets merged or gets bought out, the stock value goes to zero, all of those things are risks for that $14 million illusion that you have.

Holly Draper: So with death, a person who has RSUs cannot designate a beneficiary like they can with other types of accounts?

Guy Rodgers: That’s right. That’s right. It’s because there’s not a benefit yet to vest to give to somebody. Until that day happens, it’s a contingent benefit, and so there’s nothing to give to anyone. If, for example, your RSUs have matured and they’ve now vested in your name, they’re yours, right?

So yes, you can in that instance have a successor, but you can’t name someone to wait in your stead, for example, because there’s no benefit yet accrued.

Holly Draper: Okay, so let’s shift a little bit and talk about characterization when we are looking at RSUs. So I know Texas Family Code 3.007 D through E and the Berry case are essential in showing us how RSUs get characterized in a Texas divorce.

Can you walk us through the rules related to characterization?

Guy Rodgers: Yeah. So I … Mo- most people that even if they’re not familiar with RSUs may be familiar with a pension plan, right? A defined benefit plan. And we always say on those, it’s if, as, and when, right? It’s an if, as, and when benefit. You get a portion of your spouse’s benefit if they get it. You get it as they get it. Is that coming in a lump sum, or is it over a 20-year period? And you get it when they get it. You’re in the boat with them, we say.

So RSUs are incredibly similar, and therefore 3007 and Berry are the perfect corollaries for that division procedure. Because when you’re having a pension divided, we normally look at months of marriage and months of employment, and the months of employment may continue after the divorce, or they may have preceded the marriage.

The same is true with RSUs. You may have a tranche that preceded the marriage or on a five-year vest or a 25-year vest. If we get divorced today, it won’t vest for 25 years, and we’ve only been married one of those years. Only one of those 25ths is community. We’ve been married four years, and we’re gonna get divorced, and these tranches come due next year. They’re gonna vest in year five. We have a community interest in four-fifths of that five-year tranche.

So we have a community interest and a separate property interest is anytime we have a tail on either side, time before the marriage, time after the marriage, and you use 3007 just like you would in a Berry case for a pension. The math is the same, and it’s also based on months. So I always tell people that’s something to be very mindful of. We’re not talking about the full tranche year. We’re talking about months.

Now, we always want to be opportunistic. If somebody else is not paying attention, let’s use the year if it’s to our benefit, but the rule is month by month.

Holly Draper: So if someone has multiple grants vesting on different schedules, do you have to run that formula for every single separate one, or is there a shortcut?

Guy Rodgers: I will tell you that the only thing I’ve historically charged a fee for, if lawyers are referring a case to me, my philosophy has always been I’ll help you negotiate this case and figure out what’s best for the client, understand what’s what, and I don’t charge a dime for that. The only thing I charge for be- I, I’m hoping to get the client, right? Long term, I help them manage their money, and that works out well for me.

However, doing that waterfall chart that I discussed on every grant invest, which could be five and 10-year blends, it makes my head hurt. It takes me hours to do correctly, especially if someone wants me to then do a time value of money computation and apply a 60/40 portfolio blend so we can have an understanding of what would that be worth today. I charge for that. I don’t charge for anything else I do.

But yes, you have to do that for each slice of each tranche. So if you’ve got 10 years of employment and some 10-year vest, some seven-year vest, some five-year vest, you can have some of all of that in somebody’s account, and you’ve got to go through each one depending on the date of marriage, and compute the months on each one of those tranches. And then that, then you go to the next year, and then the next year, and then the next year. And so some years you’ll have adding on, some years they’ll be falling away depending on the grant that was done in year eight, nine, seven, three, whatever ago.

Holly Draper: So obviously if we’re not talking about very many RSUs, then that can be something that your typical attorney can just figure out.

Guy Rodgers: Yeah.

Holly Draper: Is there a certain threshold where you think, look, you really need to bring in somebody like you to run these calculations?

Guy Rodgers: Yeah, so I say two things. I say, number one, it doesn’t matter how many there are, if you’re not really comfortable doing it, don’t… I mean, it’s the same as quadros, right? There are those that do quadros and it doesn’t scare them at all, and they’re comfortable. There are those who don’t. They’re military retirement. If you’re not comfortable doing it, it’s not worth risking your bar card over, and send them to somebody who will do them, and pass that fee on from the lawyer’s accounts to the client, because the client needs to know there’s value there.

And if there’s not many, that’s the other thing on, on the side of the, the professional doing the computations. If there’s not many, the fee’s not gonna be very bad. It’s the complex ones, the many years, and especially the present time value of money computations. Those things are more expensive and more difficult.

But even so, most of the ones I’ve done, I’ve done for under $2,500, even if they were incredibly complex. I just don’t do them for free because I don’t do them for free anymore. But even the small ones, if it’s small, it’s just a few, and you’re trying to say, “Hey, what should we do with those?” I wouldn’t even charge somebody if it’s a small thing. I’ll say, “Look, I’m gonna work with this client. We’ll work on the other aspects of the case. Here’s what I would do for this. This is a ballpark of what the valuation should be, and I would trade it for something else,” which may lead us into the next part of the discussion. But I, almost always I would trade it for something else.

Holly Draper: So we already talked a little bit about what documents to request in getting the summary plan documents. Are there any other documents that we haven’t already talked about that should be on attorney’s radars to request?

Guy Rodgers: Just, just the statements from the third party account holders, whether it’s Compushare, Fidelity, Schwab, those. And then you also wanna be mindful to look, because I’ve had this happen many times, they will move those, one spouse may move those from the Compushare account to a brokerage account that the other spouse never knew anything about, and poof, they’re gone.

Well, they appear on the tax return, so they must have just vanished. They didn’t vanish. They moved them out to another account. So you need to make sure you also are asking broad enough discovery to ask for all of those anywhere they might exist in the world, unrelated or related to the RSUs. And then when you’re looking at the statements from Compushare or whoever, you’re looking to see where are those shares, where did they go, and you might even do a little micro-tracing.

Those left the account in 2023. Did they wind up in our checking account? Where did they go and what did we do with those? Be, be cautious of that because I’ve seen enough of that to concern me.

Holly Draper: And I have seen attorneys make mistakes of not recognizing that they were already vested and cashed out and went wherever they went, and they still are using that in their RSU calculation. So I think that’s something attorneys really need to pay attention to.

Guy Rodgers: See that a lot too. They’ll double-dip, meaning you may have a brokerage account with LPL where they transferred these things to, and that’s part of the value of it, but they’re also using the Compushare statement that showed they vested in three years ago, but it also shows they left, and they’re not doing that computation.

They’re not being mindful of the fact that someone transferred them in con from Compushare to LPL three years ago once they were fully vested. So again, something to watch the statements about.

Holly Draper: So let’s talk about valuing the RSUs, and we can go back to the $14 million case. Obviously the face value shows $14 million, and you’re saying that is not the present value.

Guy Rodgers: That’s right.

Holly Draper: What is the difference, and why do so many people conflate those two things?

Guy Rodgers: So, you know, I’m old, so I think of Wimpy on Popeye would always say, “I’ll gladly pay you Tuesday for a hamburger today.” Now, even as kids, we knew that somehow that didn’t sit right. That’s because the value of something today is different than the value of it in the future.

I bought my very first house for around $50,000 that today would sell for 3 or $400,000. My very first car, I paid $600 for. Right? Those things don’t happen. Now you have to look at time value of money. Inflation hits all of us, right? And so the same thing is true with those RSUs. If we had cash today, we would like to get $2 million today.

Using the rule of 72 at 8%, that means the money will double every nine years. So in nine years, my 2 million turns into 4. In 18 years, my 2 million turns into 8, because it doubles to 4, 4 doubles to 8. And so I’ve got to look at, in that 18 years, my 2 million that I got up front for her now has most likely a historical equivalency of a value of about 18.

And that’s not contingent. It’s not contingent on him not getting fired, not quitting, not dying, not going to prison. Any of those things that could cause the termination of those. So you look at the present value, and you can extrapolate and determine what would that be worth in the future. Now, you can do the same thing retroactively.

I can look at, I do this all the time in tracing, what is the value of a stock I have today, what was the cost basis of that 22 years ago before we got married, ’cause nobody still has the records. Can you figure that out for us? You can. You can do both. But very general terms, you just need to know that a dollar today is not worth the same as it was 20 years ago or 20 years from now.

Holly Draper: So those RSUs that show a face value now of 14 million, is that also going to go up before they actually vest?

Guy Rodgers: No. Not necessarily. But typically, no, you’re given a guaranteed value or number of dollars of grant. Sometimes you’ll get shares, and if the shares go up like crazy, had a Lockheed Martin case recently, the shares ballooned dramatically over the vesting period, and so it was a lot more money than we originally had expected.

But generally, that’s, number one, that’s one of the risks, right? Remember we talked about corporate solvency? So that’s a risk, where if you have diversification like the S&P 500 companies, your risk for those same dollars is dramatically lower, even if they’re still stock invested, not treasury invested, right?

So even if they’re in the same class of investment, the risk is dramatically lower when you’re looking at what are the odds that all of these 500 blow up versus this one Remember, I’m old enough to remember when Enron was on Time Magazine as the most valuable and perfect company in the United States, and it’s gone, right?

And so you gotta be careful about all of those things in determining that time value of money. So you do run some risk, and so we found a way … Now, those were not RSUs, those were founder shares, but we found a way to incorporate some upside and downside protection for both sides that both of us could live with and, and so you can work on some of those things.

Be so careful that you don’t put all of your eggs in that basket. That young lady at 14 million was convinced she was gonna get seven or eight, and that was gonna make her set for life, and it didn’t.

Holly Draper: So I understand why she should 100%, if she can get $2 million now, jump at that. How do you convince the guy on the other side to give up $2 million now when he could get fired tomorrow and, and get nothing from these RSUs?

Guy Rodgers: Yeah, so first off, they’re not divisible. That’s our first line of argument. They’re not divisible, meaning in all of the summary plan descriptions, you cannot use a quadro to divide them. So that’s an asset that is going to have to be awarded to him, and we’re certainly gonna argue to our court they have value.

I’d … On the flip side, if I’m representing the party with the RSUs, I try to apply a discounting risk. I’ll use actuarial tables to say, “Hey, there’s a 15% chance he dies before he’s vest.” And so we’ll look at that, right? But at some point in time, you’re gonna have to have some meeting of minds because she, the, the non-employee cannot at all be awarded those.

So somehow they’re gonna have to get put in the one party’s column, and you’ve got to negotiate and frame to a judge the best way to divide the rest of the estate. And you say, “Look, Judge, I don’t know if he’s gonna die. I don’t know if he’s gonna quit. But as long as he has no bad behavior and he doesn’t die, and he stays with this company, he’s got $14 million.”

Then if we’re on the other side, we’d say, “Yes, but discount that present value and it’s only worth three or two.” So there’s that argument, that dance going back and forth on both sides. That’s why you’ve got to really understand that part of it . But, but the other thing is you can, you can have mediation or trial.

You can sometimes use people’s own attitude or self against them. That’s one thing we often do with RSUs. We tell the people, “Listen, you’re, number one, you’re fully in control of this is a great company you’re working for. You get to decide how long you wanna work for that company. If you wanna leave and go to another company, you’re in control of that, and you can get new grants from the new company.

We don’t have anything to do with those. So you’re fully in control. So you work for this company, you believe in this company. Is it a good company?” And they’ll say, “Yeah, it’s a great company,” or, “It’s a bad company.” At least then you kinda pin them down. Once they tell you it’s a good company and it’s done them well, and you’ll even pu- I’ve even had times where we pulled out their corporate forecast, all those things.

Especially when you’re only dealing with five years, it’s pretty easy to pin it on them and say, “Judge, we can’t get it. They can. So even if we’re gonna discount it a little bit, let’s give it to him and let’s take a trade-off from another asset.”

Holly Draper: So sometimes there aren’t other assets, and there’s nowhere to pull that $2 million from-

Guy Rodgers: Right

Holly Draper: or however much it is to buy somebody out, and we don’t really have a choice but to say we’re, we’re splitting these RSUs. So when we do that, logistically, what does that look like?

Guy Rodgers: So the first thing is I always say that normally in a case that has RSUs, you have a 401that normally is moderately large.

Normally. So I always say, let’s look to that and see if there’s a last chance place we can pull some extra money. And so we’ve done that before at the last minute, say, “Look, there’s not anything anywhere else to pull from. Let’s do this.” And especially when you have these assets in the market, they’re contingent as well, so you’re kind of in the same boat, you’re both taking risks.

But if there’s nothing else, and there’s no way, or you can’t get up to what is a fair number using other assets, then you appoint the employee as the constructive trustee for the receipt of those. And now it becomes problematic in another way, ’cause let’s assume you’ve got a $500,000 a year employee who’s just gotten divorced from someone who’s making nothing or, you know, nominal wages.

When those grants happen, they’re taxed as ordinary income, and they’re taxed at the rate of the $600,000 employee. And so now you’re losing 42% of those to income tax as a single person. And so you’ve gotta be mindful of that as well, that you’re in the bed with the other side, not just on the division, but also on the tax. And so you’ll have them distribute an after-tax computed amount to the alternate payee or the non-employee spouse. So you need to make sure your decrees are properly draw- drawn that show how you’re going to prevent there being a tax issue, especially if you’re on the side of the employee. Because if you don’t clearly delineate that it’s net tax, after-tax dollars at the rate of the employee, you gotta give a bigger chunk to the other, you really have hosed the employee. So be careful about that tax language.

And then secondarily, you now run the risk of their failure to comply with the distribution requirement. And so you can secure that however you want. You certainly want judgment language, you certainly want enforceability language that’s very clear that within seven days from the receipt and the distribution, um, and you know, and you’re gonna make them get a report from their CPA, then you’re gonna make them follow up when the taxes are actually filed, make sure the rate was correct and true it up. You’ve gotta cover yourself in those ways too.

Holly Draper: As far as drafting for enforceability, do you have any other tips for lawyers about what they need to be sure gets included when dealing with RSUs?

Guy Rodgers: So if we’re gonna be contingent trustees, right, if we’re gonna, if we’re gonna be in business partnership with the former spouse, you’ve gotta have that tax language, right? Be sure. And by the way, I think it was Charlotte Bradshaw a few years ago did a really good job at Advance, and has a good paper that shows some of that language. And somebody, maybe 10 years ago, there was a paper with golden handcuffs in the title, also good with regard to language. And then if you look at the Advance drafting, and the TAFLs conferences every year, they have some good language regarding this every year.

But the tax language is the number one that gets screwed up. The enforceability on timeline and delivery gets screwed up all the time, maybe more than the tax language, ’cause you don’t have a deadline for them to turn the money over. Is it– And the good news is, like I told you, it’s normally February, March, April, and you have a time that you expect it, so at least you have a time when you think it should be coming.

But if you don’t have enforceability language, then you have a little bit of a problem. You need to have some delivery language. Those are the biggest ones. And then if you have the ability to have a judgment for the unknown amount, do that. I’ve actually had cases where we secured the payment by the amount of cash value in a life insurance policy that was required to be updated annually.

So we knew the cash value was still in the life insurance policy, and if they didn’t deliver the RSU money, in this instance, they had to deliver that regardless. If they lost their job and didn’t get the vest or the grant, we then went after the, the money in the life insurance policy. But it still gives you some protection. If there’s anything like that, another piece of land or something that you can put a lien on or a levy on.

Holly Draper: So, and now for our listeners who aren’t watching and who are just listening, we are going to, um, share a screen here to kind of show some formulas. We’re gonna try and explain them so you hopefully will understand what we’re talking about if you’re just listening. But, either go find this online on my website or on YouTube, or you can reach out to either one of us and we can share this with you. Okay, so why don’t you tell us kinda what are we looking at here?

Guy Rodgers: So this is a pretty cool slide. It actually helps both for RSUs, and this is the same formula under Berry versus Berry.

And so all it does is tell you that you need to separate the community from the separate. And, and it, it very clearly at the top gives you the rule. The denominator is the… And this, this one’s set up not for pension, it’s set up for RSUs. But the entire grant to vest period counted in months, so if we have a five-year period, that’s 60 months, and then the numerator is the portion of that period occurring outside of the marriage. ‘Cause that portion is going to be the separate property portion, and that portion can be, I say, a tail on either end. It can be either pre-marriage or post-marriage.

And there’s an example one and an example two that shows exactly how to do that math. And again, those are our five-year vests, and it shows a marriage day, year one. So you’ve got, on the example number one, you’ve got 12 months of pre-marriage, so 12/60, ’cause it’s a 60-month vest, 48 months during the marriage. So in that instance it’s pretty easy to do. You have a 20% separate property and an 80% community property.

And just like, uh, in a pension, the community property is divisible, but it’s not receivable by the alternate payee. So let’s remember that. We’re just trying to come up with an interest, the valuation for the interest. So the community in that instance owns 80% or has an 80% interest in those vests, right? But also, if they’ve not yet occurred, they’re contingent. All right?

So same thing on the other side. The divorce happens in the middle, and you have community portions at the beginning. So example number two, we’ve got 36 months occurring before the divorce. Those 36 months are community, and the remaining 24 months would be the separate property employee, who we’ve named Harry. We’ve got Harry divorcing Sally. And, so you’ve got 36 months of community, 24 months. And so then you’ve got a 24 months divided by 60, so 40% separate property, 60% community, and that 60% is divisible.

I didn’t apply a 50/50 ratio or anything like that to the community portions. I just wanted you to be able to see what that looks like for the community portions.

Holly Draper: So then down here you have a little exclamation point warning symbol. What is this about here?

Guy Rodgers: So it’s telling you, let’s say we have a five-year mar- a five-year bre- grading period, and they’re married year two to three, then years one to two and years three to five would be separate. So you could have, as I always say, the tail on either end can be on both ends. So if you have a community portion of time that only applies to there in the middle, you do it the same way. You just apply the community tranches and the separate property tranches.

The goal is the separate property tranches are the numerator, the community pro- tranches are the vest, and that gives you the community property a- apportion.

So if you had what I said before, if you had periods on either side, you may only have 20% community. It’d be the inverse of example number one. You might have 20% community and 80% separate, and you’re dividing the 20% community and the 80% separate would be affirmed to the employee spouse. The same formula works under Barry for pension plans. It’s the same thing.

Holly Draper: So we’re just about out of time, but if you had to boil all of this down to one thing a family lawyer should never do with an RSU award, what would it be?

Guy Rodgers: Don’t divide what you haven’t seen and you don’t know exists. And I’m gonna, I’m gonna, I’m gonna put the bow on our $14 million illusion. They gave us the 4 million. So a few months after the divorce, she got the $4 million of the divorce. That was, like, in June. In December, on the 24th, the son of that marriage had dinner with the uncle and the dad in Chicago. Dad flew in from Brussels. They had dinner, and the uncle says to the son, “Did you hear about your dad’s new job?” And the son says, “What new job?” “Dad has a new job with a new software company.” And the son, who was at that point in time taking the LSAT, fixing to go to law school, said, “Wait a minute, Dad. You walked away from all those millions of dollars of grants. How can you do that?” And the uncle slaps the, the s- son on the arm and says, “Are you kidding? He renegotiated with the new company, got a shorter grant schedule, and more grants up front.”

Now, you’ve been involved in these kind of deals before. You know how long a deal like that would take, that employment agreement would take. The reason this guy finally did the deal was because if we’d have continued litigation for another year, she’d have got a chunk of that, ’cause that job was happening and we just didn’t know it.

So yeah, one of the things I always say now in a really big exam, ask if they’ve had any interviews or any consultations with any other employers. She called her lawyer and myself on Christmas Eve at about 11:00 Central Time. It freaked both of us out. We both answered the phone, and she’s sobbing because she would have had zero.

Holly Draper: Nothing.

Guy Rodgers: And so she’s a great client now, one of my biggest advocates. She’s a great friend, and she will not let me forget that Christmas Eve phone call.

So the number one thing is you’ve got to know what you’re dividing, you’ve got to fully understand it, and if you don’t, I’ll help you. Somebody else can help you. Just make sure you don’t risk your bar card on what you think is understanding about those things.

Holly Draper: And it sounds like your recommendation would be you always want to divide this before the divor- or, you know, get paid out something today-

Guy Rodgers: Absolutely

Holly Draper: and not carry the RSUs into the decree.

Guy Rodgers: I would never take that risk. I mean, I just wouldn’t. I would rather take, you know, the old bird in the hand thing. I’d rather take something rather than that contingent benefit, especially after the lesson we learned with that case. She would have had nothing.

Holly Draper: Excellent. Well, thank you so much for hopping back on with me today. Yeah. I know that was really helpful for my own personal understanding of RSUs, so I know our listeners will also get a lot of value out of that. If our listeners want to contact you, where can they find you?

Guy Rodgers: I’ve got a, I’ve got a webpage. They can get ahold of me through the state bar webpage as well. But my email is [email protected], [email protected], Guy Rodgers Private Wealth Strategies, and I’ll get right back to you.

Holly Draper: Perfect. Thank you so much.

Guy Rodgers: Thank you, Holly.

Holly Draper: For our listeners, if you enjoyed this episode, please take a second to leave us a review and subscribe to enjoy future episodes.

Announcer: The Texas Family Law Insiders Podcast is sponsored by the Draper Law Firm. We help people navigate divorce and child custody cases and handle family law and appellate matters.

For more information, visit our website at www.draperfirm.com.