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Executive compensation is a valuable divorce asset

On Behalf of | Mar 3, 2021 | High Asset Divorce, High Net Worth Divorce |

Divorce complications may increase with the value of assets, especially if your spouse has a valuable compensation package. It takes more work to understand and address executive compensation in a high asset divorce.

Executive compensation packages

More than 15 million employees possess stock options and restricted stock plans, and it is anticipated that the use of this compensation will increase even more. During the pandemic, corporate compensation committees used these compensation plans to keep and attract talent because of their lost profits.

Stock options

As an incentive, employers provide employees with options to buy stock in the future based on the price on the date this was granted or the grant price. But stock options and restricted stock have vesting periods where the employee cannot exercise the option. These usually last one to five years.

In other words, employees can buy stock at the much lower grant price than its actual current market price when they exercise their option. This may provide a substantial profit.

It is important to consider the tax consequences of stock options when placing a value on and dividing these assets. Profits from stock options may be taxed as ordinary income for the year the options are exercised. Depending on their tax bracket, an employee may pay up to 40 percent or more in taxes. Without careful planning, spouses may give up money in their divorce negotiations.

Spouses also need to follow the stock performance closely. The stock option may have little value if its price dropped since the date of its grant price.

Restricted stock awards

Restricted stock awards are being provided more than stock options. Awards and units have limitations. These are like stock options because employees cannot sell them until they vest.

Employees forfeit their rights to the stock, however, if they leave the job or fired. The entire value of the restricted stock is taxable at higher ordinary tax rates when it vests.


Stock options and restricted stocks have vesting periods when the rights to those assets may not be exercised. Employees face the risk of giving up these rights and lots of money by leaving the company before the stock options vest or if the stock does not meet performance benchmarks.

There are different types of vesting schedules which can affect whether the asset may be divided in a divorce. Graded vesting involves receiving a certain percentage of shares after year of employment. Cliff vesting sets a designated number of years.

Divorce issues

Separating stock options may be difficult in a divorce. Most employers do not permit the transfer of stock options or restricted stock to another person even in a divorce.

To allocate this asset in a divorce, the employee spouse may hold the stock options or restricted stock in a constructive trust for the benefit of their soon-to-be former spouse. The divorce settlement agreement should contain language addressing this option to assure that this asset is allocated fairly.

The agreement should also address tax consequences for this asset because one spouse may pay taxes for the stock’s entire amount even though the other spouse acquires its full value. The employee spouse is responsible for paying all the taxes when the shares are exercised or sold even if they must transfer its proceeds to their non-employee spouse.

Finding this asset

Spouses may not negotiate the allocation of this asset if the employee spouse is not transparent about their finances.  Finding another spouse’s compensation plans may be challenging.

This compensation rarely appears on paychecks. The employee spouse may suffer a convenient memory lapse about their unexercised stock options or unvested restricted stock.

Important information on these plans may be in the incentive compensation plan document, the summary plan description, award correspondence and yearly award benefit statements. The employee manual and employment offer letter may also contain valuable information about incentive plans.

An attorney can assist you with locating these incentive plans, establish their value and help you seek a reasonable share. They can also help you seek a fair settlement of other assets.


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