Divorcing a millionaire is not something for the faint of heart. Because there are so many assets, you have the additional burden of understanding the many and often complicated financial holdings.
If you or your spouse is a high-powered executive, you most likely have executive compensation. Over 15 million employees have stock options and restricted stock plans, and this number is expected to balloon in the coming years.
According to Avani Ramnani, one of the top divorce financial planners in the country, “Corporations use employee stock plans to motivate, boost morale, spur productivity and retain their best talent. More frequently than ever before, COVID cash-strapped companies are awarding stock options and restricted stock to their key employees.” Corporate compensation committees turn to these incentive compensation plans to help bridge the gap and retain the best talent despite their shrinking profits, making them even more prevalent in divorce negotiations. Ramani continues, “The more you know about these assets, the better your position to negotiate an equitable divorce settlement.”
As an incentive for hard work, an employer will give an employee the option to buy company stock in the future based on the stock price on the day it was granted (“grant price”). However, there is a catch. Stock options and restricted stock have vesting periods, meaning that the employee may not exercise them for a period of time, usually one to five years.
For example, lucky Amazon employees who received stock options back in 2016 with a vesting period of five years, would be able to exercise them now. The grant price for these stock options would be roughly $600, because this is the price Amazon was trading at during the time the options were awarded to the employee. Instead of now paying the current market price of approximately $3,000 for Amazon stock, our fortunate employee must only shell out $600, making a tidy profit. In this case, the gain is a hefty $2,400 per share ($3,000-$600)!
Ramnani, who has an expertise in these compensation plans, shares, “It seems too good to be true … and it is. The $2,400 gain 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 upwards of 40% or more in taxes.”
Lisa Zeiderman, managing partner of the matrimonial law firm Miller Zeiderman, LLP., is extremely well qualified to handle complex financial divorce matters. Zeiderman has worked on dozens of cases with valuable executive compensation assets and cautions, “It is crucial to consider taxes when you value and divide these assets. Too many divorcing spouses leave money on the negotiation table because their team of experts did not advise them properly about the tax consequences of exercising stock options.”
On the other hand, these options would have little to no value if Amazon had performed poorly after the stock options were granted five years ago. If Amazon’s current stock price was below the grant price of $600, there would be very little to argue about this asset of now modest value.
Restricted Stock Awards and Units
Even more prevalent than stock options are restricted stock awards. As the term implies, restricted stock awards and units have some limits. Like with stock options, employees cannot sell them when they receive them, but must wait until the shares vest. Restricted stock awards are sometimes considered “golden handcuffs,” because employees who leave or are fired forfeit their rights to the stock. Once the restricted stock vests, the entire value becomes taxable at high ordinary income tax rates.
You could lose the entire value
As mentioned before, both stock options and restricted stock have vesting periods, meaning that they may not be exercised for a period of time until they vest. If the employee leaves the company before the stock options vest or fails to meet performance benchmarks, they could be forfeiting these assets and leaving a massive amount of money on the table.
Vesting schedules come in various shapes and sizes: graded vesting (receiving a certain percentage of shares after each year of service) or cliff vesting (for a designated number of years). The different types of vesting schedules can affect what you can claim as marital property and are subject to division in your settlement agreements.
Division Can Get Messy
According to matrimonial attorney Zeiderman, “One of the biggest challenges includes how to separate stock options in a divorce. Division can get messy because most employers do not allow stock options or restricted stock to be transferred to another person, even if there is a divorce.” What do you do when you cannot divvy up 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 stock in a constructive trust to benefit the non-employee spouse. Your lawyer must include this language in drafting the settlement agreement to protect you and ensure that you receive your fair share of the options and restricted stock.”
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 of the taxes due even if they must transfer the proceeds to the non-employee spouse. Essentially, one person could get stuck paying taxes for the entire amount of the stock, while the other slips away with the whole value.”
Following the breadcrumbs
Incentive compensation plans typically do not show up on a tax return. They rarely are present on a paycheck, making this form of compensation tough to track down and untangle during a divorce. For a spouse looking to hide assets, it can be easy to “forget” about unexercised stock options or unvested restricted stock.
According to Davon Barrett, a Certified Financial Divorce Analyst at Francis Financial who works with divorcing women, “It can be like finding a needle in a haystack. Follow the breadcrumbs to see where they lead, and you will be able to find out if your spouse has a type of valuable executive compensation.” Barrett’s favorite documents of choice for discovering these hidden gems include the incentive compensation plan document and summary plan description, award letters and annual award benefit statements. “Even the employee manual and original employment offer letter can offer valuable clues to the existence of incentive compensation plans.”
According to Barrett, “The best defense you have is a good offence if you are concerned that your partner is not disclosing an employer stock plan and you are worried that you may not get your fair distribution of those assets. A crack team of financial and legal professionals can help you find these assets, determine the value, and make sure you get your fair share.”
Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc. (opens in new tab), which she founded 15 years ago. She is a Certified Financial Planner® (CFP®) and Certified Divorce Financial Analyst® (CDFA®) who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 15,000 women.