Divorce and executive compensation

How Executive Compensation Complicates Divorce Settlements

During a recent survey, more than 35% of divorcees cited finances as the primary friction point in the marriage. The American Academy of Matrimonial Lawyers further found that divorce rates are higher among high earners than the average American and that divorce rates actually rise during periods of economic growth. AAML divorce attorneys also noted that with greater wealth comes greater complexity due to factors like executive compensation, which can be difficult to discover and very challenging to distribute even when found.

What is Executive Compensation?

There are more than 15 million American employees with stock options and restricted stock plans, and economic experts expect that number to balloon in the decade ahead. The corporate world is highly competitive, and companies often compensate employees beyond just their normal salaries. Executive compensation is not only used as a form of payment but also as a tool through which companies can retain talent, motivate employees, boost morale, and spur productivity. Common examples of executive compensation include:

  • Stock options
  • Option grants
  • Restricted stock plans
  • Long-term incentive plans
  • Deferred compensation plans

How Does Executive Compensation Affect a Divorce?

According to many divorce lawyers who handle divorces involving wealth, executive compensation presents two core challenges. The first of those is discovery. Executive compensation typically does not appear on a pay stub or in some cases even a tax return. A lawyer will often have to search for those additional assets, and that can prove even more difficult if the spouse is actively trying to hide them.

The second core issue is equitable distribution. Imagine a scenario in which a spouse received a stock option with a five-year vesting period. At the end of the period, the stock is worth $2,500 but can be purchased at the $500 price the stock traded at when the option was awarded. This seems like a clear $2,000 windfall per option, but that is immediate income with taxes perhaps as high as 40%. How many options do you exercise? Do you sell any? Do you let any expire? As you can see, there are a lot of moving parts that make it all but impossible to come up with an exact figure for property division purposes.

Executive Compensation May Affect Alimony and Child Support Too

The complexities of executive compensation extend beyond just the division of assets. It factors into the total wealth of the couple, and your family lawyer may use those assets to determine, if applicable, how much spousal and child support is fair. Often, those assets will not be realized until cashed in, but your lawyer can take the steps needed now to ensure that the support is updated when that occurs.

Assets That Cause Divorce Settlement Challenges

There are many different types of executive compensation, and all of them can present unique challenges. Retirement plans are often quite difficult to deal with according to divorce attorneys because there are usually harsh tax penalties if you cash them out now. Capital gains is a complex topic because the spouse who possesses the stock will eventually incur hefty tax penalties, and non-transferrable stocks can present challenges as can vested stock options and restricted stock awards.

Constructive Trusts

A constructive trust is one of the most powerful tools available to divorce lawyers in order to protect their clients’ interests when it comes to stocks and similar assets. Constructive trusts are not “trusts” according to the traditional definition but are rather a construct created through the power of the court. Ideally, a constructive trust ensures that the ex-spouse controlling the asset does what is in the best interest of both parties and awards the other party the appropriate benefits. That could include dividends on an annual basis or a fair share of the sale of the stock. Achieving this ideal typically requires a precise legal contract that sets the parameters for the trust and puts mechanisms in place for the spouse who does not control the asset to protect their own interests.

Getting Your Fair Share of Executive Compensation

If you are in a marriage where there is executive compensation involved and you are thinking about divorce or perhaps have had it thrust upon you, family law attorneys recommend certain steps to protect yourself. You should:

  • Begin collecting evidence as soon as possible
  • Seek representation from a divorce lawyer
  • Hire a forensic accountant if necessary
  • Be creative with your solutions

Collect Evidence

This is good advice for practically any divorce, but the stakes are certainly heightened when dealing with executive compensation. Collect any evidence that you think may be relevant. That includes bank accounts, pay stubs, and receipts. Make copies of anything that you could lose access to and keep them in a safe place. You should also maintain a journal in which you jot down any details that may be relevant down the line. Your lawyer can help you sort that information later.

Seek Representation

Meet with a lawyer as soon as possible. The earlier the better. Even if you are unsure whether you are going to proceed with the divorce, the steps you take now to protect yourself can make a significant difference later if you do choose to move forward. It’s also important to choose a law firm that has experience dealing with these types of cases as there will be challenges that the average family lawyer has never dealt with before.

Forensic Accounting

Hiring a forensic accountant may be necessary if your spouse is actively hiding executive compensation and other assets from you. Generally, you will want to meet with a divorce attorney first and then take this step based on their recommendation.

Be Creative With Solutions

New Jersey is an equitable distribution state. That means marital assets and debts will be divided by a judge fairly but not necessarily equally. Splitting everything down the middle may not be possible or supported by the courts even if it is. Lawyers advise that when it comes to complex matters like executive compensation, what is important is that you are treated fairly and position yourself for a successful future rather than secure every last dollar that may be owed to you in the future.

The Legal Assistance You Need

If you need assistance with a divorce that involves executive compensation, Lawrence Law is here for you. Our family law attorneys have extensive experience navigating divorce settlements, including those involving wealth that is challenging to divide equitably. You can meet with one of our attorneys to have your case reviewed, and you can schedule that appointment by calling us at 908-645-1000 or by using the contact form on our website.

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