Top 5 Most Common Mistakes When Spouses Are Dividing Executive Compensation
In this podcast with My Divorce Solution’s hosts, Karen Chellew and Catherine Shanahan, Marianna outlines the most common mistakes she observes as a Certified Divorce Financial Analyst (CDFA) when it comes to dividing Executive Compensation Benefits during a divorce.
Click HERE to listen to the full episode on your favorite podcast channels.
1. Not Knowing That Your Spouse Has Executive Compensation Benefits.
Equity compensation is tricky. The only way to pick up this valuable asset as the non-employee spouse is through a year-end paystub, and only if the stock options have been exercised or the RSUs vested that year. Once it’s determined there is equity comp involved, the following documentation should be requested during the divorce discovery process:
Annual awards statement
Job Offer letter (if new employment)
Any and all exercise/vesting/sale invoices for stock options and RSU’s that were exercised or vested before or after the date of separation
Summary Plan Description (SPD)
2. The Marital Settlement Agreement (MSA) Lacks Explicit Language Stating How The Assets Are To Be Divided.
More often than not, executive compensation cannot be split in a generalized 50/50 (or 60/40 etc.) manner like brokerage and retirement accounts can. This is because most employers do not allow stock options or restricted stock to be transferred to non-employee spouses, even in the case of divorce. It is imperative that your attorney includes precise language when drafting the settlement agreement, which means that in order to do so, you will need to request specific documentation that outlines your spouse’s executive compensation benefits.
3. Not Including A Clause In Your MSA That Outlines How The Taxes For Vested And/Or Exercised Equity Compensation Will Be Reconciled.
Stock options and RSUs are owned by the employee spouse. When they vest and/or get exercised, the taxes will align with the employee’s marginal tax rate which may not equate to their effective tax rate. Furthermore, if the effective tax-rate is lower or higher than the marginal tax rate, the MSA clause should detail how the difference in tax liability will be handled between both spouses.
4. Double Counting Equity Compensation As An Asset AND Income, OR Confusing Which Category The Compensation Falls Under.
Every scenario differs from the next, though all are incredibly complex. The real question is: “How do you realize the value of Executive Compensation and make sure it’s equitable for each spouse?” This question is of utmost importance because you can either divide at the time of settlement by trading other assets, you can choose to defer division until the time of vesting and/or exercise, or you can include as additional income in the support payments.
5. Not Specifying How The Process Will Work Or Not Following Through Once Your Divorce Has Been Finalized.
Executive compensation division is often a lengthy process. Both spouses will have likely moved on with much of their everyday life by the time their divorce is finalized, which often means forgetting the finite details of how and when the next steps are executed.
An additional costly mistake:
Hiring A Financial Planner And/Or A CPA Who Is Not Well Versed In Equity Compensation Benefits And Hiring Them AFTER The Divorce Process Is Finalized Rather Than Working Together From The Beginning.
Your financial planner, ideally a CDFA, should be reading your MSA in its entirety to be sure that it contains all the correct language to protect you. This includes but is not limited to ensuring you are receiving an equitable distribution of assets, the type and value of the equity compensation, and how and when transfers will be executed post-divorce (as well as what parties are responsible for each step in the transfer process).
Similarly, it is imperative that you hire a CPA that understand the intricacies of executive compensation in order to ensure that you are taxed correctly at the time of distribution(s). Together, with your Financial Planner/CDFA, you will have a team of professionals to empower you and provide allyship during the throes of complicated divorce scenarios.