An introduction to dividing stock options, restricted stock, or other executive compensation during divorce.
If you or your spouse must decide how to separate stock options, restricted stock (RSU), or other executive compensation, it can be challenging at best. Several of these items provide income and can be difficult to value – or even understand! Let me walk you through a primer and try to remove some of the mystery.
If you or your spouse must decide how to separate stock options, restricted stock (RSU), or other executive compensation, it can be challenging at best. Several of these items provide income and can be difficult to value – or even understand! Let me walk you through a primer and try to remove some of the mystery.
Employee Stock Options, what are they?
The most common type of non-wage compensation used to be stock options in shares of the employer company. Accounting rule changes have made them less common, but there are still plenty of plans out there. Occasionally, the options can even be for shares of a different, related company. There are two primary types of stock options: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQs). Generally, you won’t see ISOs anymore since recent tax changes have made them less advantageous for employers. The difference between the two is in tax treatment and transferability. Stock options give an employee the right – not the obligation – to buy stock at a discount at some date in the future and are usually subject to some sort of vesting schedule. Where it gets tricky is if the options are partially vested at the time of divorce but can’t be touched for four more years. Obviously, some of the intrinsic value belongs to the spouse, but how much? The calculations are ugly. Trust me: you need to bring in an expert to perform the calculations correctly.
Restricted Stock, what does this mean?
Restricted stock is now the most commonly-used form of executive compensation. This is shares of company stock given to an employee as either compensation for past performance or an incentive for future performance. It’s critical to get the actual grant documents to know which the case is since it makes a big difference when determining how many of the shares are marital property. They can be in two forms: either actual shares of stock (RSAs), or a right to acquire shares at vesting (RSUs). RSAs have less risk than RSUs, and they are usually worth something. Again, depending on award dates, vesting schedules, dates of marriage and separation, the marital portion can be quite complex to calculate, but it is critical that you have it done. This is a job for a CDFA® (Certified Divorce Financial Analyst) or other financial experts familiar with executive compensation issues.
Employee Stock Purchase Plan, what is this?
This is a benefit that allows the employee to buy company stock at some regular frequency, usually at a price that is discounted from the current market price. Purchased shares can be sold immediately, or they can be held for at least a year for more favorable tax treatment.
Deferred Compensation Plans, what are these?
With this option, the employee can choose to defer some portion of current compensation until a future date. These deferrals may be salary, bonus, or even equity compensation. Sometimes the employer will also match these deferrals. They are totally discretionary, so any spousal maintenance should be based on total compensation before any deferrals. Any balances in the plan are likely marital property as well and should be analyzed carefully. Most plans are distributable at retirement, but some plans allow distributions during employment as well. These plans can also be either qualified, pre-tax contributions or non-qualified.
My spouse has executive compensation and has filed for divorce. Now what?
Do yourself a favor and bring in a Certified Divorce Financial Analyst (“CDFA”) as early as possible, preferably before the discovery phase. The CDFA will be able to provide you with a list of exactly what documents will be necessary to properly value the assets and determine marital property vs. separate property. This will prevent any last minute scrambling if you end up at trial. Most CDFA professionals are qualified to do this, but not all. Be sure to find one who is well-versed in executive compensation.
It will also help if the CDFA is available for any depositions so that he or she can be qualified as an expert early and preview for the other party the quality of financial information that you’re having prepared. Sometimes, this is just what it takes to encourage a settlement!
The CDFA can also help ensure that the final Settlement Agreement is written to properly reflect the way the compensation will be handled. Executive compensation accounts are not usually eligible to be given to a non-employee spouse at the time of divorce, so the employee spouse must have very specific instructions on what must happen to specific shares, options, and grants upon vesting that takes into account the taxation responsibilities, etc.
Executive compensation can be very complicated, and if you take it on yourself, you’re exposing yourself to a lot of risk. These assets are often substantial pieces of the marital pie and it is critical that they are valued correctly so that you can negotiate the best settlement.
If you have further questions, please don’t hesitate to call me at 202-872-0400.