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Divorce Negotiations and Stock Options

How Executive Compensation Could Affect Your Divorce Settlement

For New Jersey couples with significant financial assets, several contentious issues may arise during divorce negotiations. Property division and alimony decisions can be affected by various types of assets and compensation, including non-traditional income such as executive compensation or employee incentives. A New Jersey divorce lawyer can work with a divorcing spouse to protect their interests and pursue a fair settlement.

Executive Compensation and Other Income

Executive compensation and incentives have become increasingly important parts of the compensation package for many high-ranking executives and other employees in multiple industries. While the tech industry is perhaps best known for certain types of incentive compensation, over 15 million American workers have some form of this type of perquisite, including restricted stock plans and stock options. This number is expected to continue to grow, especially as the success stories linked to this type of compensation have received widespread attention. Executives at companies like Apple and Amazon have reaped massive gains as their companies have become some of the largest and most profitable in the world.

In addition, startups and other cash-poor companies may opt for giving out this type of compensation as an alternative to paying executives a higher income, especially since these plans have been shown to help retain talent and boost morale.

However, executive compensation differs in several important ways from other, more straightforward, types of income and compensation. A family law attorney may advise a divorcing spouse to review tax returns and other financial documents to fully gain a financial picture of the couple’s situation. As executive compensation and incentives become a more important part of the overall compensation package for many high earners, a family law attorney can work with a divorcing spouse to understand how it could affect the overall settlement.

Stock options and similar forms of compensation are generally not considered income at the time they are granted, so they are not included on tax returns and similar documentation. However, they can still be an important part of understanding a divorcing couple’s financial situation.

How Stock Options and Restricted Stock Units Work

Stock options essentially provide an executive or other employee with the option to buy their company’s stock in the future, not at the current price but rather at the price of the stock the day the option was issued. In most cases, people exercise their stock options by selling their stock to reap the difference in price. For example, someone who received Amazon stock at an early stage when it was worth around $18 per share would be able to receive massive profits by selling it at the 2021 price of $3,500 per share.

Stock options cannot be exercised right away. They have a vesting period, typically one to five years, before the employee can exercise them. While stock options are not included as part of an employee’s taxable income at the time they are issued, this does not mean that they are not taxed when the employee actually reaps a financial benefit. The exercise of stock options is taxed as income and depending on the seller’s situation, this may place them into a higher tax bracket. This also means that family lawyers negotiating stock options in a divorce settlement may need to consider the tax consequences of exercising options in order to achieve a fair outcome. The value of stock options cannot be fully considered without understanding the tax impact.

Restricted stock units are somewhat different than stock options. These awards provide potential shares of stock that do not vest until a later date, again, typically one to five years in the future. Employees who quit their companies or are terminated lose the restricted units. Only once the restricted stock units vest do they become a part of the employee’s stock portfolio and are thus subject to taxation upon sale.

This type of compensation is only taxed after options are exercised or restricted units vest because stock prices may vary greatly, and some companies’ stock prices may quickly decline rather than rising. If employees had received stock in a book-and-mortar bookseller rather than in Amazon, their options’ value may have gone down in value in the same 20-year period. Taxation at the time of exercise ensures that the correct value of income is taxed, rather than a speculative and changing value. A New Jersey family lawyer can advocate for a proper distribution of taxes as well as potential value in a divorce negotiation. It is also important to distinguish when these sources of income are relevant for alimony or subject to equitable distribution so as to avoid a double dip.

Asset Division of Stock Options or Restricted Stock

Because of their conditional value, it can be difficult to divide or value stock options or restricted stock units during divorce negotiations. Divorce attorneys for both parties may disagree greatly about the value to assign to this compensation. In most cases, stock options and restricted stock units may not be directly transferred to another person. This can prevent what appears to be the fairest solution: simply assigning some of the options to the other spouse, as would be the case for a typical investment account.

New Jersey is an equitable distribution state. This means that both spouses may not be entitled to an equal share of the executive compensation, even if it was fully received during the marriage. New Jersey judges aim to divide property and assets based upon what is believed to be fair, rather than resorting to a direct 50/50 split.

It may be possible for a divorce attorney to negotiate a settlement in which the stock options or restricted stock units are subject to a constructive trust, requiring a later division between the employee and non-employee spouse, as well as equitable distribution of the tax burden associated with the exercise or vesting of this compensation.

In other cases, the non-employee spouse may agree to relinquish any claim on the stock options or restricted units in exchange for a greater share of other property and accounts. Of course, this can be more contentious, especially when the parties are far apart in their valuation of this as-yet-unvested compensation.

What About Hidden Assets?

Because stock options and restricted stock units are not documented on an employee’s tax returns at the time they are issued and are generally not visible on pay stubs, this type of incentive compensation may be difficult to document. When hidden assets are a potential risk in a high-asset divorce, stock options may be some of the items more likely to go unreported in family court or during divorce negotiations.

In many cases, both spouses have been relatively open with one another about their financial circumstances. However, when there are trust issues involved or the divorce is more contentious, spouses may wish to look for plan documentation, annual award benefit statements and other employer-provided documentation to establish the presence and value of a restricted stock units plan.

Of course, other types of hidden assets may be a concern, including cryptocurrency accounts, offshore accounts or some types of trusts. A divorce lawyer can work with their client and experts like forensic accountants to uncover hidden assets in these cases.

Contact a New Jersey Family Law Attorney

An experienced divorce attorney can help either spouse in a high-asset divorce to advocate for a fair settlement and protect their rights and interests. Contact the experienced lawyers at Lawrence Law by calling our conveniently located Red Bank, New Jersey, office at 908-645-1000 or use our secure contact form to request an appointment today.

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