Divorce and Deferred Compensation
Deferred compensation comes in many forms, the most familiar being retirement funds and pensions. But the compensation packages of many executives, salespeople, and high-level professionals in the IT and engineering fields include complex compensation benefits that are tied to performance or that reward loyalty.
Since these benefits often represent a significant portion of the couple’s wealth, they need to be divided equitably in a divorce. Your divorce attorney needs to have financial experts on the team who understand the breadth of deferred compensation options and can advocate for your best interests in the division of assets in your divorce.
Types of deferred compensation
Some companies employ various financial incentives to encourage and reward high-level results from their employees. The incentives may be tied to individual performance or to the collective performance of the company, thus fostering teamwork and loyalty. Some are paid shortly after performance, and others vest over time.
Stock-based compensation provides employees with equity in the company and may vest after the person has been employed for a certain number of years. These include options like:
- Restricted Stock Units (RSU)
- Stock options
- Employee stock purchase plans (ESPP)
- Performance-based stock awards
Other deferred compensation may include:
- Long-term incentive plans and deferred bonuses
- Nonqualified deferred compensation (plans that let executives postpone income for tax or retirement purposes)
- Annual or quarterly personal performance bonuses
- Profit-sharing
- Commission, payable when the project is complete or the sale is final
- Retirement and pension plans that grow over time
How deferred compensation is divided
In both Pennsylvania and New Jersey, marital assets are divided equitably, which does not mean the same thing as equally. The most important factor in determining whether the asset is marital or separate property is how much of the compensation was earned during the marriage.
It is fairly easy to determine the division of bonuses, because they are usually determined by past performance. If the period of performance or even a portion of the period takes place during the marriage, that portion is a marital asset. For instance, if a spouse is expecting a performance-based bonus at the end of the year but divorces at the end of September, the court would equitably divide the bonus based on nine months of performance, even though the bonus will be distributed after the divorce.
Deferred and indirect compensation are much more complicated and require a financial expert on your divorce team to recommend to the court a fair division of these assets. Vested stock options, RSUs, and other vested incentives usually require a complex calculation to determine the value of the compensation during the marriage while considering future value based on market expectations and the company’s growth potential.
When dividing equitably, courts take into consideration a number of factors, including:
- The income or income potential of each spouse
- The number of years married and the lifestyle the family enjoyed
- Other property or finances that the spouses may share
- Personal property or assets of each spouse
- Debt or expenses, both marital and personal (such as a school loan incurred before marriage)
- Any non-financial contributions, such as homemaking or childcare
- Any legal written agreements regarding the division of property
These complex financial vehicles have factors to consider, such as tax implications and the time until the funds are distributed. These are important issues to consider when making requests to the court and negotiating a settlement.
At Karen Ann Ulmer, P.C., we have the right team to argue for your financial interests regarding deferred compensation. You need an expert on your side. Call us today to schedule a consultation.
