Contemplating Divorce During Bonus, Equity Award Season
Throughout the Covid-19 pandemic, some corporations have had less cash to reward their key employees and therefore, chose to award RSUs.
RSUs will likely continue to be a common form of executive compensation. C-suite employees are not the only ones who receive these types of compensation packages. More and more, entry-level hires are also receiving equity award compensation packages, which means they are an asset to be valued and equitably divided in a divorce.
For financial planners, it is imperative to identify and understand these assets as they are very often significant portions of a client’s net worth. It is also important to collaborate with your client as to how best protect these assets as a client negotiates a prenuptial agreement, a postnuptial agreement, or proceeds through a divorce.
When Your Client Is The Earning Spouse And Eyeing A Divorce
If your client is considering a divorce, is the earning spouse and wants to keep future earnings on their side of the ledger, it is likely that the sooner they file for divorce the better. Even unvested stock can be considered marital property if it was awarded for past performance, such as a sign-on bonus.
If the unvested stock is instead being given as a part of an incentive package like “golden handcuffs,” then a portion of that unvested stock may still constitute marital property.
How much of that unvested stock is marital? That requires a close reading of the plan documents, the summary plan description, the award letters and other documents including the employment offer letter or contract. You and your client should review these documents together and gain an understanding of what the employer’s intention was in awarding the stock.
Was the grant a reward for future performance or past performance? It will also be important to ascertain whether the restricted stock units are subject to forfeiture including if your client is terminated or if they and/or the employer fail to meet certain performance goals.
It is also important to familiarize yourself with a coverture formula known as the DeJesus Time Formula. It is a fractional formula in which the time from the grant of the stock plans until the commencement of the divorce is the numerator and the time from the grant until the interest in the stock vests is the denominator.
When Your Client Not The Earning Spouse, And Has Been Asked For A Divorce
If your client is not the earning spouse, and their spouse has asked them for a divorce and recently received a bonus, it is very important to understand how your client’s spouse received this executive compensation and to value it appropriately.
Stock options, restricted stock and other forms of executive compensation are among the easiest assets to hide or overlook. Many clients who are not in charge of household finances might not realize that their spouse has these potentially high-income benefits.
When Your Client Is Entering Into A Prenuptial Or Postnuptial Agreement
In the event that your client is entering into a prenuptial or postnuptial agreement, and s/he or his or her soon-to-be spouse has or will be receiving these types of equity awards as bonuses, your analysis also may require familiarizing yourself with the DeJesus Formula.
There Are Basic Questions To Ask About Equity Awards As Bonuses
There are many issues to consider about these complex financial instruments:
• Are they vested?
• How will they be valued?
• How will they be divided?
• What are the tax implications?
• For support purposes, will they be considered an asset, income, or both?
• Will a company transfer stock to a non-employee spouse?
Stacy Francis, CFP, CDFA, CES, whose practice focuses on advising women during and after divorce, says, “Financial advisors should also include the tax impact of RSUs versus other assets. The employee will pay ordinary income tax rates on the entire value of the RSUs when the shares vest (not when they’re granted) creating a hefty tax bill. If the employee continues to hold the shares after they vest, any increase in the stock price from the value when vested will be taxed at capital gains rates.”
Francis shares cautionary stories of reading settlement agreements that were written so poorly that the contract did not sufficiently discuss who would pay the taxes on these valuable assets. In one case, the couple ended up back in court because the agreement required the employee to pay 100% of the taxes and the non-employee spouse was able to receive her portion pre-tax.
Knowing how to help your clients work through these life changes with the best financial advice possible does a service to you both.