Nancy Hetrick 2013-07-17 00:13:44
Divorce Settlements and Executive Compensation Nancy Hetrick is the owner of Divorce Financial Strategies, LLC and a financial advisor with Clarity Financial LLC. As a certified divorce financial analyst [CDFA™], she assists clients and their attorneys to understand how the financial decisions he/she makes today will impact their financial future. She has over 13 years of experience in both investment management and financial planning. Nancy is also an accredited wealth management advisor (AWMA), an accredited asset management specialist (AAMS), a chartered mutual fund counselor (CMFC) and a trained mediator. For more information, see her website at www.nancyhetrick.com or contact her at 602-349-0164 or email@example.com. As a family law attorney, you’re sure to see divorce cases that involve one party employed as an executive with a corporation. Often these types of positions include several types of non-wage income that can be very difficult to value – or even understand! Let me go over the basic types. Employee Stock options The most common type of non-wage compensation is stock options in shares of the employer company. Occasionally they can even be for shares of a different, related company. There are 2 primary types of stock options, Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQs). You won’t see ISOs much anymore as some changes in taxation to employers have made them less advantageous for employers but there are still some old ones out there. The difference between the two is in tax treatment and transferability. Stock options give an employee the right, not the obligation, to buy stock at a discount at some date in the future and are usually subject to some sort of vesting schedule. Where it gets tricky is if the options are partially vested at the time of divorce but can’t be touched for 4 more years. Well, obviously some of the intrinsic value belongs to the spouse but how much? The calculations are ugly and trust me, you just want to bring in a certified divorce financial analyst, CDFA™, or other expert to have it done right. restricted Stock Restricted stock is shares of company stock given to an employee as either compensation for past performance or an incentive for future performance. It’s critical to get the actual grant documents to know which the case is for your client. It makes a big difference when determining how many of the shares are marital property. They can be in two forms, either actual shares of stock (RSAs), or a right to acquire shares at vesting (RSUs). Restricted stock has less risk than options and is rarely worthless. Again, depending on award dates, vesting schedules, dates of marriage and separation, the marital portion can be quite complex to calculate. This is another job for that CDFA™. Employee Stock Purchase Plan This is a benefit wherein the employee is allowed to buy company stock at some regular frequency, usually at a price that is discounted from the current market price. When the shares are purchased, they can be sold immediately or held at least a year for more favorable tax treatment. Deferred compensation Plans With this option, the employee can choose to defer some portion of current compensation until a future date. These deferrals may be salary, bonus or even equity compensation. Sometimes the employer will match these deferrals also. They are totally discretionary so any spousal maintenance should be based on total compensation before any deferrals. Any balances in the plan are likely marital property as well and should be analyzed carefully. Most plans are distributable at retirement but some plans allow distributions during employment as well. These plans can also be both qualified, pretax contributions or non-qualified. I just got a case where the spouse has executive compensation. Now what? Do yourself a favor and bring in a CDFA™ as early as possible, preferably before the discovery phase. The CDFA™ will be able to provide you with a list of exactly what documents will be necessary to properly value the assets and determine marital property versus separate property. This will prevent any last minute scrambling if you end up in trial. Most CDFAs™ are qualified to do this but not all. Be sure to find one versed in executive compensation who feels comfortable with the task. It will also help if the CDFA™ is available for any depositions so that he/she can be qualified as an expert early and preview for the other party the quality of financial information that you’re having prepared. Sometimes this is just what it takes to encourage a settlement! The CDFA™ can also help ensure that the final settlement agreement is written to properly reflect the way the compensation will be handled. Executive compensation accounts are not usually eligible to be given to a non-employee spouse at the time of divorce so the employee spouse must have very specific instructions on what must happen to specific shares/options/grants upon vesting that takes into account the taxation responsibilities, etc. Executive compensation can be very complicated and if you take it on yourself, you’re exposing yourself to a lot of risk. These assets are often substantial pieces of the marital pie and it is critical that they are valued correctly so that you can negotiate the best settlement for your client.
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