Every person facing divorce has at one point or another had to figure out how to deal with the financial implications of their impending divorce. If you are a W-2 wage earner without performance-based bonuses or commissions, then divorce negotiations will likely be a little bit more clear-cut. In couples who have complex income and asset structures, it is critically important to understand how various types of income are treated as well as the tax consequences any such decisions trigger. It’s great to get a big settlement, but what if that settlement comes with significant tax implications or you learn the money won’t be accessible for a decade? Alternatively, if you are able to get tax savings in a settlement, the bottom line may be much more palatable. If things like bonuses, stock options, perks, and prepaids are part of the way you or your spouse is compensated, you should be prepared for more complex negotiations. And if you or your spouse is in charge of setting your own compensation, you could face challenges in coming to terms with what your income should be.
Stock options in particular have unique considerations in determining what is marital versus non-martial when it comes time to divide them as part of a divorce settlement. While the rules of stock options differ from state to state, generally here in New Jersey, the portion of options earned as compensation during the marriage are considered marital. However, this does not always mean they are automatically subject to be divided by a 50-50 split. This could mean the percentage your spouse is entitled to may become the subject litigation should you not be able to negotiate terms. The formula for stock options becomes complex because of things like timing and vesting issues have to be factored into any division. The law classifies the options in two (2) categories:
- Options awarded to enhance future employment efforts which are not subject to equitable distribution; and
- Options granted in recognition of past employment performance are subject to equitable distribution.
In negotiating an agreement, a present-value payout or committing to “if, as and when” distribution language in your Property Settlement Agreement may be necessary in your particular situation. In my experience, stock options are very misunderstood, which makes having an attorney well-versed in such transactions very valuable.
Another unique situation that may occur is when one party changes jobs during the divorce process. For instance, if you or your spouse changes employment where your compensation includes stock options or other types of future vesting rights, the new employer could offer a matching package as an incentive to leave the old company. This can create a conflict in your divorce as to whether this is new compensation or a signing bonus, which your spouse may not hold claim to, or assets your spouse would have been entitled to had you stayed with the first company. Negotiations will determine whether these assets should be subject to division.
These are just two examples, and really the point is if you are considering filing for divorce and you or your spouse have complex compensation packages, you will need to seek advice from an experienced attorney and likely from savvy financial professionals. Regardless of which side of the coin you are on, the decisions that are made as part of the divorcing process are going to impact the rest of your life. Even if you are very financially savvy and understand these compensation vehicles, if you don’t understand the law, you may find yourself making a bad financial decision.
Robert Adinolfi is a shareholder and partner with ALBRM with over forty years experience in the practice of divorce and family law. Mr. Adinolfi has represented many clients with complex compensations structures