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How to divorce a millionaire (tip: pay attention to executive pay)

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Divorcing a millionaire is not something for the faint of heart. Because there are so many assets, you have the added burden of understanding the many and often complicated financial holdings.

If you or your spouse is a senior executive, you most likely have executive pay. More than 15 million employees have stock options and restricted stock plans, and this number is expected to increase in the coming years.

According to Avani Ramnani, one of the nation’s top divorce financial planners, “Companies use employee stock plans to motivate, boost morale, boost productivity and retain top talent. More frequently than ever, cash-strapped COVID companies are granting stock options and restricted shares to their key employees. Corporate compensation committees are turning to these incentive compensation plans to close the gap and retain top talent despite declining profits, making them even more common in divorce negotiations. Ramani continues, “The more you know about these assets, the better your position is to negotiate a fair divorce settlement. “

As an incentive for hard work, an employer will give an employee the opportunity to buy shares in the company in the future based on the share price on the day it was granted (“price d ‘granting”). However, there is a catch. Stock options and restricted stocks have vesting periods, which means the employee cannot exercise them for a period of time, typically one to five years.

For example, lucky Amazon employees who received stock options in 2016 with a vesting period of five years, could exercise them now. The grant price for these stock options would be around $ 600, as this is the price Amazon was trading at when the options were granted to the employee. Instead of now paying the current market price of around $ 3,000 for Amazon stock, our lucky employee only has to shell out $ 600, making a net profit. In this case, the payout is $ 2,400 per share ($ 3,000- $ 600)!

Ramnani, who has expertise in these compensation plans, shares, “It sounds too good to be true… and it is. The gain of $ 2,400 from the previous example is taxed as ordinary income in the year the options are exercised. Depending on the tax bracket, the employee could pay up to 40% or more in taxes.

Lisa Zeiderman, managing partner of the marriage law firm Miller Zeiderman, LLP., Is extremely well qualified to handle complex financial divorce cases. Zeiderman has worked on dozens of cases with valuable executive compensation assets and cautions, “It is crucial to consider taxes when you assess and divide these assets. Too many divorced spouses leave money on the negotiating table because their team of experts did not advise them well on the tax consequences of exercising stock options.

On the other hand, these options would have little or no value if Amazon had performed poorly after granting stock options five years ago. If Amazon’s current share price were below the grant price of $ 600, there would be very little reason to discuss this now modestly-valued asset.

Restricted share grants are even more widespread than stock options. As the term implies, restricted stock awards and units have certain limits. As with stock options, employees cannot sell them when they receive them, but must wait for the shares to vest. Restricted stock awards are sometimes seen as “golden handcuffs” because employees who leave or are laid off lose their rights to the shares. Once the restricted shares have been acquired, the total value becomes taxable at high ordinary tax rates.

As mentioned earlier, stock options and restricted stocks have vesting periods, which means they cannot be exercised for a certain period of time until they vest. If the employee leaves the company before the stock options vest or fail to meet performance criteria, they could lose those assets and leave a huge amount of money on the table.

Vesting schedules come in different shapes and sizes: gradual vesting (receiving a certain percentage of shares after each year of service) or bulk vesting (for a set number of years). The different types of acquisition schedules can affect what you can claim as marital property and are subject to division in your settlement agreements.

According to marriage attorney Zeiderman, “One of the biggest challenges is how to separate stock options in a divorce. The division can get complicated because most employers do not allow the transfer of stock options or restricted shares to another person, even in the event of a divorce. »What to do when you cannot distribute this asset as you can with a brokerage or a savings account?

According to Zeiderman, “The employee spouse must hold the stock options or restricted shares in a constructive trust for the benefit of the non-employee spouse. Your lawyer should include this language in the drafting of the settlement agreement to protect you and ensure that you receive your fair share of options and restricted actions.

Zeiderman continues, “Your lawyer will also want to address the tax ramifications in the legal agreement. When the shares are exercised or sold, the employee spouse is responsible for paying all taxes due even if he has to transfer the proceeds to the non-employee spouse. Essentially, one person could get stuck paying taxes for the full amount of the stock, while the other would run away with the full value.

Incentive compensation plans generally do not appear on a tax return. They are rarely present on a paycheck, making this form of compensation difficult to track down and disentangle during a divorce. For a spouse who seeks to hide assets, it can be easy to “forget” unexercised stock options or unvested restricted stock.

According to Davon Barrett, Chartered Divorce Analyst at Francis Financial who works with divorcing women, “It can be like finding a needle in a haystack. Follow the breadcrumb trail to see where they lead, and you’ll be able to find out if your spouse has any valuable type of executive compensation. Barrett’s favorite documents for uncovering these hidden gems include the Incentive Compensation Plan Document and Summary Plan Description, Award Letters, and Annual Benefit Statements. “Even the employee handbook and the original job offer letter can offer valuable clues as to the existence of incentive compensation plans.”

According to Barrett, “The best defense you have is a good offense if you are worried that your partner will not disclose an employer stock plan and you are worried that you are not getting your fair allocation of those assets. A team of financial and legal professionals can help you find these assets, determine their value, and ensure you get your fair share.

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