Dividing Executive Compensation in Illinois Divorce: Stock Options and RSUs

Divorce becomes more complicated when one or both spouses hold equity-based compensation. In Illinois, understanding how executive compensation division in Illinois divorce works is critical to protecting your legal and financial interests. Equity compensation can be difficult to classify, value, and divide, especially when grants are tied to future service or performance.

This article breaks down how Illinois courts handle these assets, what formulas they use to determine what’s marital vs. non-marital assets, and what documentation you’ll need to gather to prepare. We also explore enforcement strategies and what to expect post-divorce—all from a legal perspective.

At Anderson Boback & Marshall, we guide high-net-worth clients through the legal maze of asset division, ensuring equity compensation is treated with precision and foresight.

What Falls Under Executive Compensation?

Executive compensation includes more than a salary or cash bonus — it often represents a significant portion of a professional’s total financial picture. This can include:

• Stock Options: Rights to purchase company shares at a predetermined price
  • Incentive Stock Options (ISOs): Tax-advantaged options available only to employees
  • Non-qualified Stock Options (NSOs): More flexible options with different tax implications
• Restricted Stock Units (RSUs): Company shares promised upon completing vesting requirements
• Performance Stock Units (PSUs): Equity awards tied to specific company or individual performance metrics
• Deferred Compensation and Long-Term Incentive Plans: Payment for services rendered now but received in the future

These forms of compensation often come with conditions, such as future service, company performance metrics, or time-based vesting. During divorce, they are frequently misunderstood, undervalued, or omitted from disclosures, making them a common source of legal disputes. Illinois courts must determine not just whether these assets are divisible, but also when and how. This is particularly true when dividing stock options in Illinois divorce cases, where equity awards may span both marital and non-marital periods.

Classifying Executive Compensation

When dividing executive compensation in divorce, Illinois courts must determine whether the assets are marital or non-marital. Each type of compensation carries unique implications for classification and potential mistakes. This table summarizes the distinctions:

For a broader understanding of complex assets in divorce, review our article  ‘What You Need to Know About High-Asset Divorce.’

Illinois Law: What Counts as Marital vs. Non-Marital

Illinois follows equitable distribution principles when dividing property in divorce. For executive compensation, the critical question is: What portion of these assets is marital versus non-marital property?

Illinois law distinguishes between marital and non-marital property based not just on when the asset was granted, but also why. Courts examine whether the equity compensation was intended to reward work already performed (which favors marital classification) or to incentivize future service (which leans non-marital).

The Key Factors Illinois Courts Consider:

• Grant Date: When the award was officially granted
• Purpose of Award: Whether it compensates past performance or incentivizes future service
• Vesting Schedule: When the award becomes available to exercise or receive
• Employment During Marriage: How the award relates to employment during the marriage

The General Rule in Illinois:

• Marital Property: Awards granted during the marriage as compensation for past or ongoing service
• Non-Marital Property: Awards earned before marriage, or granted for future performance, even if vesting occurs during the marriage

Courts often look at the plan documents, employment agreements, and testimony to determine intent. A grant labeled “retention-based” or tied to milestones may be partially or entirely non-marital.

How Illinois Courts Handle Executive Compensation Division in Divorce

Illinois courts use a time-based coverture formula, commonly known as the ‘Hunt formula’, to determine the marital portion of unvested executive compensation, such as stock options or RSUs. The Hunt formula involves:

1. Numerator: Time employed during the marriage (from grant to divorce date)
2. Denominator: Total time from grant date to full vesting
3. Result: Percentage of the asset considered marital property

Unlike some states that use separation dates as the cutoff, Illinois courts specifically use the divorce date, which can significantly impact the valuation when proceedings last many months.

Critical Illinois Case Law

In In re Marriage of Frederick (1991), the Illinois appellate court established that unvested stock options granted during marriage represent marital property subject to division. This precedent shapes how Illinois courts handle these assets today.

The court held that:

• Stock options granted during marriage are presumptively marital property
• The Hunt formula determines the proportional marital interest
• Even unvested options can be divided based on this approach

Hybrid Compensation

Equity granted before the marriage but vesting during it may be partially marital. This creates particularly complex classification challenges in Illinois courts:

• The “time rule” applies specifically to these hybrid assets, with courts calculating precisely what portion of the vesting period occurred during the marriage.
• Courts examine whether continued employment during the marriage contributed to the eventual vesting. This type of complex analysis is frequently required in Illinois divorces involving unvested stock options, where both the timing and purpose of the grant must be carefully evaluated.
• Special attention is given to whether the pre-marriage grant was part of a signing bonus (more likely separate property) or ongoing compensation (more likely to have a marital component).
• Documentary evidence becomes critical, including offer letters, grant documentation, and employment records.
• Expert testimony often becomes necessary to establish the proper classification and valuation of hybrid assets.

In one notable Illinois case, a spouse received RSUs six months before marriage that vested two years after the wedding. The court applied a time-based analysis and determined that 80% of the award was marital property since that proportion of the vesting period occurred during the marriage.

What Your Divorce Agreement Needs to Include

When equity compensation enters the divorce equation, your divorce decree must include precise provisions addressing:

Required Components for the Divorce Decree:

• Specific identification of each equity award (grant date, type, quantity)
• Clear formula for division of both vested and unvested assets
• Tax liability allocation between parties
• Mechanism for transfer, division, or constructive trust arrangement
• Contingency provisions for plan changes or employment termination

Without these specific provisions, enforcement becomes difficult or impossible, particularly years after divorce when unvested awards finally become available.

Our firm creates customized divorce decree language that aligns with both Illinois precedent and specific employer plan requirements. For a broader understanding of potential issues, explore our article on mistakes to avoid in your high-asset divorce.

Valuation and Tax Implications

Executive compensation carries significant tax implications that must be addressed in your divorce agreement. Under IRS Section 83, different equity vehicles trigger different tax events:

• RSUs typically create ordinary income upon vesting
• ISOs may trigger alternative minimum tax upon exercise
• NSOs generate ordinary income at exercise and capital gains/losses upon sale

While we work closely with financial advisors on valuation strategies, our legal structure ensures:

• Proportional Tax Burden: Fair allocation of tax liabilities when assets vest or are exercised
• Constructive Receipt Issues: Addressing who bears tax responsibility when awards vest
• Enforcement Mechanisms: Legal tools to ensure compliance with tax provisions

In complex cases, we often recommend working with a forensic accountant to ensure all assets are properly identified and valued.

Enforcing Equity Division After Divorce

Because equity compensation often vests years after divorce, strong enforcement mechanisms are essential. Without proper enforcement language, even the most favorable division can become unenforceable. Illinois courts have developed several specialized tools to address these unique challenges:

Constructive Trusts

Constructive trusts provide a powerful legal remedy when direct division of equity awards isn’t possible due to employer restrictions or plan limitations. These legal arrangements:

• Create a fiduciary obligation for the employee spouse to hold and manage a portion of the assets for the benefit of the non-employee spouse
• Establish specific timelines for when the employee spouse must distribute proceeds from exercise or vesting events
• Require detailed accounting of all equity award transactions, including tax implications
• Include provisions for what happens if the employee spouse leaves the company or experiences forfeiture events

The arrangement clearly establishes that while legal title remains with one spouse, equitable ownership belongs to both according to the divorce decree’s specified formula. In Illinois, constructive trusts are often used in divorce cases involving stock options when employer plan rules prevent direct division or transfer of the equity awards. These trusts create a fiduciary duty for the employee-spouse to hold and manage the awarded assets on behalf of the non-employee spouse, ensuring the equitable portion is delivered when vesting or exercise events occur. Courts typically enforce these arrangements when clear decree language outlines the marital share and timeline for distribution.

QDRO-Like Provisions

While Qualified Domestic Relations Orders (QDROs) technically apply only to retirement accounts, similar specialized provisions can be crafted for equity compensation:

• Unlike standard QDROs, these provisions must address specific employer requirements and plan restrictions
• They often include specific “alternate payee” language acknowledging the non-employee spouse’s legal interest in the awards
• Tax consequences must be addressed directly, as unlike retirement assets, constructive receipt triggers immediate tax liability
• Specific employer notification requirements must be included, often with attachments that satisfy corporate legal departments
• Special provisions address what happens if the company experiences acquisition, merger, or plan modification

Illinois courts have increasingly accepted these specialized provisions as an effective solution, particularly after the Frederick decision established the importance of properly addressing unvested compensation.

Employer Compliance Documentation

Many equity division failures happen not because of legal errors, but because employer plan administrators simply don’t recognize or implement divorce decrees. Effective employer documentation includes:

• Employer-specific forms that acknowledge the divorce decree terms and satisfy internal compliance requirements
• Specific notification procedures including where, when, and how notices must be sent when vesting or exercise events occur
• Direct plan administrator contact information and procedures to verify the implementation of the division
• Required certifications and attachments that satisfy securities laws and internal corporate requirements
• Alternate procedures if the company changes plan administrators or record-keeping systems

Our firm works directly with major Illinois employers’ HR and legal departments to ensure these provisions are acceptable before finalization, preventing costly post-decree compliance issues.

Post-Decree Monitoring Systems

Even with the best enforcement language, active monitoring is essential, as equity events often occur years after divorce:

• Calendar systems that track vesting schedules and prompt timely verification of proper division
• Formal annual disclosure requirements that document all activity in equity compensation accounts
• Specific remedies if either party fails to comply with monitoring requirements
• Protocols for addressing employment changes, including job transitions to new companies

Without these protective mechanisms, clients often face expensive post-decree litigation or lose substantial value through unenforceable provisions. In one recent Illinois case, a spouse lost over $180,000 in vested options simply because the decree lacked specific monitoring provisions that would have detected the exercise event.

Feeling overwhelmed by the complexity? Access our guide: Messy Issues in High-Asset Divorce → Perfect for cases involving layered compensation, stock awards, or hidden income issues.

Checklist: What to Gather for RSU/Stock Option Division

Clients and their spouses should begin organizing key documents that will help their legal team properly evaluate, classify, and structure the division of RSUs and stock options. This checklist includes:

• Equity Award Documents: Stock Option Grant Agreements, RSU/PSU Plan Summaries
• Vesting Schedules and Plan Rules: Employer documents outlining vesting timelines and restrictions
• Pay Stubs and Compensation Statements: W-2s or income breakdowns showing how awards are reported
• Employment Agreements or Offer Letters: May indicate whether equity was compensation for past vs. future performance
• Company Policy on Division/Transfers: Some plans restrict division unless the decree uses specific language
• Past Tax Filings (If Applicable): Shows historical treatment of exercised options or vested RSUs
• Working Draft Divorce Decree Language (if any): Sample provisions for timing, tax liability, or QDRO-like structures

Each of these helps ensure that marital property is identified correctly, and your agreement is enforceable post-divorce.

FAQs: Common Legal Questions About RSUs and Stock Options in Divorce

Can my former spouse claim stock options that vest years after our divorce?

Yes. Illinois courts have established that options granted during marriage may be partially marital property even when vesting occurs years after divorce. The Hunt formula determines what portion belongs to the marital estate based on the time between grant and vesting that occurred during the marriage.

How do Illinois courts treat unvested RSUs?

Illinois courts consistently recognize unvested RSUs as divisible property to the extent they were earned during the marriage. The Hunt formula is typically applied to determine the marital portion, with emphasis on when the awards were granted rather than when they vest.

Are stock options considered marital property in Illinois?

Stock options granted during the marriage are presumptively marital property in Illinois. However, if the options were granted based on future performance or as an incentive for future employment, courts may classify a portion as non-marital property.

What happens if my employer won’t split my stock options?

Many employer plans prohibit direct transfers of equity awards. When this occurs, we implement alternative legal structures such as constructive trusts or deferred payment obligations to achieve the same economic result while complying with plan restrictions.

Why Legal Experience Matters

Executive compensation in Illinois divorce requires specialized legal knowledge that goes beyond general family law practice. At Anderson Boback & Marshall, we provide:

• Illinois-Specific Expertise: Deep understanding of how local courts apply coverture fractions
• Executive Compensation Focus: Specialized knowledge of equity compensation structures
• Strategic Protection: Proven approaches that safeguard complex assets through and beyond divorce

The difference between general representation and specialized counsel can significantly impact your financial future, particularly with assets that vest over multiple years.

Our team understands the challenges of executive compensation division in Illinois divorce, from employer restrictions to post-decree enforcement.  Schedule a confidential consultation to protect your equity-based assets.